Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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....................................................... Pump Price (nominal ¢/litre)...................................................................... 30 Figure 10: CPI Index Comparison ...................................... 35 Figure 16: Monthly Demand vs......................................... 69 Figure 36: Halifax .................................................................................................................................................................................................... 34 Figure 15: Monthly Rack Prices: Selected Markets .....Price History................................................................................................................................ 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .................................................... 49 Figure 26: Outlet Revenues....................................................................... 58 Figure 32: Toronto .......................................................... 47 Figure 24: Outlet Volume vs................................Price History.. Gross Product Margin ........................................................................ 24 Figure 6: 1995 Retail Outlets by Province ......................................................................................................... 63 Figure 34: Montreal .Price History ..................................................................................... 53 Figure 28: Vancouver ..Price History................................ 25 Figure 7: Outlet Representation by Mode...........................................Selected Centres .........................Price History...........................1988-1995 ................................................... 56 Figure 30: Regina ............................................... 46 Figure 23: Average Annual Throughput per Outlet.............8¢ Pump Price) ............. 71 MJ ERVIN & ASSOCIATES i ................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $).............................................. 36 Figure 17: Study Market Methodology ........................................................................... 66 Figure 35: Saint John NB ............................................................................................Price History ...................................tax..................List of Figures Figure 1: Pump Price / Margin Model............................................................................. 70 Figure 37: Charlottetown ........... ex-tax elements .................................................................... 28 Figure 8: Outlet Representation by Service .................Price History ............. 43 Figure 20: Ex-Tax Pump Price Elements ...................................Regular Unleaded ................................................. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ......... 40 Figure 18: 1995 Average "Blended" Pump Price ....Price History ............. 57 Figure 31: Winnipeg ..................................................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ...........................Price History .Price History........................................Price History ........................................................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.................................. 4 Figure 2: 1996 Average Prices/Margins ...................... 62 Figure 33: Ottawa ........... 33 Figure 13: Monthly Gross Marketing Margins.........Selected Goods & Services .....................................................................................................Regional & Urban Groupings. 45 Figure 22: Petroleum Gross Product Margins ...................... 54 Figure 29: Calgary ...................................................................... Costs........... 48 Figure 25: Outlet / Volume Relationship .. 42 Figure 19: Pump Price ................ 16 Figure 3: 1996 Average Regular Gasoline Margins (56................ 44 Figure 21: Gross Marketing Margin Elements ........................................................ 24 Figure 5: Canadian Retail Outlet Population ...................................... Income.................................... 50 Figure 27: Victoria .............................

........ 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue........... 51 MJ ERVIN & ASSOCIATES ii ..........List of Tables Table 1: Downstream Sales Channels ................... 13 Table 2: Taxes on Regular Gasoline on December 31.................................................. 15 Table 3: Selected Study Markets ....................................................................................................... 1996 ..................................................................

3 ¢ 28. rack.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. represented by crude. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. This study. and ex-tax pump prices. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.4 ¢ 19.2 ¢ 24. 1996 Average Prices and Margins . supplier costs and profitability. These prices are determined in a competitive marketplace.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. and the Canadian Petroleum Products Institute (CPPI).5 cents per litre on the sale of regular gasoline in a typical major urban market. each with unique MJ ERVIN & ASSOCIATES iii . the Canadian retail marketing sector realized an average gross product margin of 3. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.1 ¢ 5. Natural Resources Canada (NRCan). and a foundation for effective policy development. dealer income. together with a separate review of the refining sector.8 ¢ TAX 28. Price competition occurs at three distinct levels in this industry. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.5 ¢ 0.

due to its prominence in the public and media domain.dynamics. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Approximately 16. Convenience store. and the traditional automotive service bay. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Dealers have a variety of relationships with their supplier. car wash. and accordingly. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. compared to about 22. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). the responsibility for deciding upon retail pump prices resides principally at the local dealer level. demand and other competitive factors existing at the time. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. this study focuses on the retail gasoline sector. and declined by 10 cents per litre measured in constant dollars.500 retail outlets were in operation in Canada in 1995. From 1986 to 1995. While each of these marketing channels operates in a competitive environment. which potentially allow for reduced margins at the gasoline pump. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet.000 in 1989. The resultant margins are therefore a reflection of the state of product supply. nine of the past ten years. are examples of ways in which outlet petroleum sales are augmented by other revenues. well over half of all outlets in Canada operate as lessees or independents. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry.

As a result of these trends. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.The “tax-included” nominal pump price increased over this same period. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.crude) 5¢ Marketing Margin (retail . MJ ERVIN & ASSOCIATES v .rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . as a consequence of refinery plant rationalization (closures) and a modest demand increase. From 1991 to 1996. This has both resulted in. and has been a result of several factors including: • • • improved refinery utilization and efficiency. however.

MJ ERVIN & ASSOCIATES vi . When petroleum gross product margins were compared to their corresponding outlet throughputs. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. That such a relationship should exist was not surprising. With the participation of several CPPI member companies. This provided for market-bymarket and regional comparisons of key competitiveness indicators.Comparison of Canada. 19 markets representing a broad range of conditions. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. rural markets. were selected for a detailed review of outlet economics. wholesale product cost and freight charges) were isolated from the pump price. With few exceptions. to derive 1995 average petroleum gross product margins for each of the 19 markets. A wide range of petroleum gross product margins were evident. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. and one by one. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. but also had significantly higher throughputs per outlet. several “outside variables” (product taxes. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. although this study provides an independent confirmation of this. This was integrated with selected NRCan price data.

6624 1.000 2.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.962 R2 = 0. and his personal labour investment. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. This study showed that an average outlet net revenue in the 19-market study group was about $70.000 6. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000 3. corporate charity. smaller markets. head office and regional office overheads.6634Ln(x) + 76. the residual revenue is available as profit to be re-invested into retail operations. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. sales processing. etc. an additional goal of this study was to undertake a comparison of outlet profitabilities. of which gross product margin and throughput are only two of several factors. brand advertising.000.000. and in major vs.• Smaller markets performed as competitively as larger centres. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000.000 Volume (litres) 4. Consequently. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. These costs would include salaries of marketing representatives and management. and/or distributed to shareholders.000.000. supplier profit: after the above costs are allocated. revenues from ancillary operations (eg: convenience store. not poor competition.000.000.000 5.. which reflects his investment in the outlet.

or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000 $50. The Canadian retail petroleum products industry.000 $250. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Average Outlet Income (before marketing overhead costs) BC/PR $300.000 vs.market study group.000) $(150. by all objective measures available to this study. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . at 1995 prices. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. $61. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.000) $(300. suppliers likely incurred a net loss on outlet operations in 1995. after allowing for estimated dealer profit and supplier overhead.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(250. Although an objective measure of competitiveness is elusive. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000) $(100. 1. and that petroleum sales revenues alone.$154.000 per year. were insufficient to cover outlet costs. Despite this difference.000 $100.000) $(350. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. distant outlets are clearly higher than those associated with concentrated urban markets.000 $150.000 $200.000) $(200. for which this study had no specific data. respectively.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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but to increases in underlying rack prices. despite the predisposition of many observers to use them as such. Indeed. this industry sector would have realized profits of unprecedented proportions. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. regardless of size. Thus. if Canadian average pump prices were only one cent higher than they were in 1995. and the associated industry initiatives which are ongoing in nature. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. While these economics might appear to place this industry in a position of poor viability. assuming all other costs were unchanged. Thus. had petroleum margins which were commensurate with average outlet throughput for that market. these findings clearly show that pump price increases are ultimately linked not to increased profits. although this study provides comprehensive evidence of this. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. crude costs. Both the downward trend in margins. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes).• • • improving production efficiency through refinery plant rationalizations (closures). 8. most outlets used in the 19-market study represent major integrated oil companies. in the long term these fluctuations are likely more reflective of market restorations. most markets. Also. virtually all of the 19 study markets exhibited similar levels of competition. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. not excessive profits. and in turn. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. A wide range of petroleum gross product margins were evident within the 19market study group. 7. When plotted against the margin-volume model. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. based upon an assumed posted rack price. When these margins were compared to their corresponding outlet throughputs. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). Industry profitability is extremely sensitive to very small changes in pump price. That such a relationship should exist was not surprising. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Nevertheless. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Outlet throughput is a key determinant of inter-market pump price differences. Thus. Also. serve as perhaps the most significant indicators of competitiveness in the downstream industry.

While competitiveness in most smaller markets was shown to be as active as in larger centres. reduce pump prices. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. average pump prices were relatively high. reducing the number of outlets may also reduce the number of competitors. and this study showed that gasoline prices were no exception. 9. it would seem that if local government in smaller markets were interested in lowering pump prices. according to the margin-volume model. Smaller. the solution would be to encourage some dealers to exit the market.5 million fewer litres of gasoline than a group A (major centre) station. • • At first glance. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. more isolated markets are generally higher than in larger centres. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. other factors exist which contribute to relatively high margins and prices. This created some economic pressure to sell product at a higher pump price. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. in order to build upon the findings in this study towards a full understanding of the dynamics at work. poor outlet throughputs were generally the predominant factor.product margins than larger markets. there are three points to consider: • • In very small markets. A full-serve retail gasoline outlet typically employs 3-5 staff. which should. The costs of most consumer goods in smaller. isolated markets face particular challenges: although found to be highly competitive. which could actually inhibit competition. thereby improving petroleum volumes and ancillary revenues at the remaining sites. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. In suggesting this approach however. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. MJ ERVIN & ASSOCIATES xiii . The loss of employment represented by a station closure may be of some concern to smaller communities. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).

will likely preserve a highly competitive petroleum market. are an acceptable limitation on pure competition (Finding 8). were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. The historical record is clear however: since deregulating pump prices. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Convenience store. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. is both the cause and consequence of increased activity in ancillary operations. and in turn. and as such.10. The federal Competition Bureau for example. possibly to the detriment of the consumer. Also. and likely others in Nova Scotia. that where a healthy competitive climate exists. many national and local environmental regulations exist for good cause. As these findings show. under the current PEI regulatory structure. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. characterized by narrow product margins and relatively flat pump prices. and the traditional automotive service bay. has seen a decline in pump prices relative to other Canadian markets. the degree of price competition in the retail petroleum has in effect. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. This competition then. MJ ERVIN & ASSOCIATES xiv . This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Charlottetown. as marketers find even more innovative ways to attract market share. the Halifax market. sometimes below that of outlet operating costs. 11. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. depressed petroleum revenues. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). car wash. is viewed as an agency which exists to the benefit of industry and consumer alike. Retail ancillary operations are a critical element of petroleum price competition. and the perceived effect on their markets. This study proposes rather. is well beyond the scope of this study. does not appear to benefit in consumer terms. as it does in the Canadian petroleum marketing sector.

A regular comprehensive competitiveness evaluation. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. and the converse image held in much of the public domain. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Public perception measurement. • • MJ ERVIN & ASSOCIATES xv . using Canadian and foreign selected markets. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. This should be in the form of a quarterly summary of price trends and related measurements. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. not inhibit. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Improve public understanding and awareness of competition in the petroleum marketing sector. petroleum marketing competitiveness. along the lines of the model used in this study. and the nature of competitiveness influences. margins and competitiveness factors. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices.1. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. using Canadian and foreign selected markets. 2. in a simple format designed for consumers and legislators.

and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and regulators alike.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. • * * * Better understanding of this industry. and in particular. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. using Canadian and foreign selected markets. by industry. MJ ERVIN & ASSOCIATES xvi . consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

to help the industry cope and to enhance competitiveness.to draw comparisons with nearby USA markets.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.. The SCF laid the foundation for supplementary studies. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. . and regional differences which face the petroleum products retail industry. face a number of challenges: a poor public image...” MJ ERVIN & ASSOCIATES 1 . which comprise the “downstream” oil industry. competitive pressures from US and offshore refiners. and a challenging array of potential environmental initiatives. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. A working group represented by Natural Resources Canada (NRCan).. and MJ Ervin & Associates was selected to undertake the “rack to retail”. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. including a regional.to analyze the rack to retail market and the market structure for refined petroleum products. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. Specific purposes of this study would be: • • • • “. and Industry Canada was convened to undertake this project. and that issues and challenges be identified so that conclusions and recommendations can be made “. and in comparison to the Canadian national average and nearby USA markets”..to determine the key factors which drive competitiveness in specific markets. and in the process.. leading to more effective policies and reduced uncertainty for future investment.. .to better understand the competitive opportunities and challenges. to name a few. or even communities within the same region.Introduction Background Canada’s petroleum refining and marketing sectors. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. or petroleum marketing portion of the study. Project Objectives The working group established as the primary objective of this study “.. the Canadian Petroleum Products Institute (CPPI).to provide a sound database upon which more effective policy decisions can be made. region by region across Canada. In 1995.... and ..

Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Ultimately. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. It also relates consumer demand patterns to pump price fluctuations. in Appendix I. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader.The study meets these objectives. and in order to provide insights into the range of competitive dynamics that can exist. from which some important findings are made. and the effect of competitiveness on each subsector. Many of the findings in this report are presented in graphical form. Supporting data to these charts can be found in Appendix II. or which have a specific meaning in the context of this report. presents conclusions and recommendations which arise from the study findings. Unless otherwise stated. through a multi-faceted approach. Findings are stated in bold and are summarized in part E of this report. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. • Part E: Conclusions and Recommendations summarizes the study findings and. due to the considerable data gathering difficulties that such an approach would entail. Part C: Historical Trend Analysis provides an overview of prices. Part D: Selected Market Study presents the findings of a diverse 19-market study. and a foundation for effective policy development. The study does provide comparisons with US markets on a national level of detail. Specific comparisons of specific Canadian and US consumer markets were not made. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. undertaken as part of this project to: • make a more detailed examination of price. margins and demand patterns over the past several years. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation).

through Bob Clapp.. including Ultramar Canada. Shell Canada. Finally. MJ ERVIN & ASSOCIATES 3 . through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). assisted in securing the support and participation of member companies in the selected markets phase of the study. Suncor Inc. and also participated in the steering committee. Petro-Canada. Consumers Association of Canada. Natural Resources Canada.. Suncor Inc.. through Maureen Monaghan and Huguette Montcalm. and Industry Canada. We gratefully acknowledge these companies.• Industry Canada. Petro-Canada. chaired the steering committee. CPPI. facilitated some of the data gathering needs of this study.. and Shell Canada. and provided critical guidance and feedback at several key stages in the process. • • Several organizations participated in two key review sessions. Ministère des ressources naturelles du Québec. Imperial Oil Ltd. for their assistance. Environment Canada. and their 481 retail associates whose outlet data was used in our analysis. NRCan. These included: Canadian Tire Petroleum. The Canadian Petroleum Products Institute. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Ontario Ministry of Environment and Energy.

An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . as they are in Figure 1. and serves to explain several factors that together determine retail gasoline prices at any given time. Yet. unlike many consumer products. And. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. These relationships can be modeled.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. most Canadians relate to this industry in one specific way: as consumers. multifaceted industry. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. or taste. but simply. In fact. its price. It is this particular feature of petroleum products . principally of motor gasoline.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. as this study shows.price . the particular quality of gasoline which is of most interest to consumers is not its colour. texture. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.

typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). “competitive” may be synonymous with “viable”.Many of the terms introduced and explained in this section are used extensively throughout this study. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. MJ ERVIN & ASSOCIATES 5 . While both perspectives are valid. is more likely to equate the term with “value for money”. So defined. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors.from the total pump revenue. objective measurement for competitiveness. consumer perspective. this study examines competitiveness from the latter. these stakeholder revenues are derived from the revenue from the retail sale. While this term is often associated with the phrase “profit margin”. Gross margin is simply the difference between two price points. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. Each margin is quantified by its defining prices. gross margin represents revenue only. any operating expenses must then be considered before making any determination of profits. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. A consumer however. margins are squeezed or expanded accordingly. this study’s use of the term relates to gross margin. and in fact inextricably related. it is important to define the term “margin”. Ultimately however. Before examining each of the model elements. an understanding of the term itself is necessary. (implying that the stated margin represents net income or “profit”).or margin . evaluating competitiveness is therefore a partly subjective process. each essentially taking a share1 . From an industry perspective.

Conditions for a competitive market can be deemed to exist when: • • more than one. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. More importantly. and unless care is taken to use the word precisely.” Price Competition in the Oil Industry In order to assess competitiveness. Accordingly. Technological change and innovation are the large levers of competition in industry. as competitors seek to attract market share through lower prices. or in other words. is the only real option in the long term.Unlike many business or economic concepts.” “. Inevitably. the result of price competition is reduced profit. this usually requires a reasonable number of competitors. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Since a competitive market effectively limits the price option. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. one must ask how marketers compete. provide some means for comparing the type and to some extent. if market conditions allow a sufficient number of players to remain profitably engaged. the degree of competition within a market. The actions by business rivals place an upper limit on the prices a firm can charge for its products. Simply put. Competition can only be sustained therefore. a universally acceptable definition of competitiveness is elusive. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Price competition. An effective functioning of markets also permits smaller competitors to expand if they meet the test. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. in order to maintain some level of brand variety. competitors can either restore higher prices or reduce costs. 1986: “Competition may mean very different things to different people.. reducing costs. represents a process by which prices are set.. improving efficiencies. To achieve this. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . and the entry of new competitors and new ideas. it can frustrate communication and obscure analysis. in the sense in which it is something in the public interest. and ideally many entities offer the same or similar products (brand variety). such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May.

(Homewood. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices.. The converse notion that the industry establishes a “should be” margin. p. whose main 1 E. Given the commodity nature of petroleum products. and Promotion. Price. Nevertheless. Jerome McCarthy. Basic Marketing: A Managerial Approach. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. commonly known as the “marketing mix”1.the variables at their disposal. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. and are beyond the scope of this study. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. in rack markets. which in turn defines a proper market price. 4th Ed.44 (1st Dec. particularly in the crude (upstream) industry and refiner sector. whose main activity is the exploration and development of crude oil. and as will become more evident in this study. is false. Within the broad context of the oil industry. MJ ERVIN & ASSOCIATES 7 . where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. which in turn defines the margins. • Thus described. Place. Irving. the most effective of these as a competitive tool is price. 1960) 2 Although distinct. competition in the crude and rack markets deserves some mention. It is also important to stress that the market ultimately sets rack and retail pump prices.: Richard D. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. Ill. the raw material from which gasoline is made. A refiner in Toronto may well compete with a refiner in Buffalo. and are generally known as integrated oil companies. The dynamics of upstream and refiner competition are major studies in themselves. and the downstream industry. the geographic scale of competition is an important consideration. New York. In fact. and in retail markets. 1971). some organizations have operations in two or more of these markets. most Canadians relate more in terms of retail gasoline marketing. so a brief description of these. or four P’s: Product. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. the “oil industry” consists of two distinct industries: the upstream industry.

the raw material from which gasoline is made. and transportation of crude oil to the refinery plant. drilling. Canadian producers must compete to sell their production to refiners. that is to say. implying that it fluctuates. In providing historical comparisons of crude to rack/pump prices. Infrastructure The upstream oil industry encompasses a broad range of operations. Although this industry is not the focus of this study. alongside major producing countries such as Saudi Arabia. which gives an accurate portrayal of month-to-month crude price fluctuations. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. in several commodities trading centres around the world. and in the open market structure that exists in Canada. which it does on a continuous basis. MJ ERVIN & ASSOCIATES 8 . a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. and refinery production methods. Within the scope of this study. rather than a fixed value. Crude oil is a commodity which is traded in a global marketplace. as a minor contributor to the world crude supply. due to variables such as crude quality. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. The upstream industry’s crude price is represented in Figure 1 as elastic. gasoline grade. While this study focuses on the downstream industry (and in particular. production. its marketing operations). from the exploration for potential crude or gas reserves. consequently. Canadian producers have virtually no influence over world crude prices. Canadian producers are known as “price takers” rather than “price setters” of crude prices.activity is the refining of crude oil into petroleum products. which finds and produces crude oil . our crude prices rise and fall according to price benchmarks established far beyond our own shores. and the delivery and sale of these products to the consumer. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. it is important to examine its relationship with its neighboring downstream industry. it is probably sufficient to say that.

From this revenue. maintenance. and from this feedstock. MJ ERVIN & ASSOCIATES 9 . put simply. who manufacture petroleum products from crude oil. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. and some attention to the refiner sector is therefore given here. is called the refinery. and pay out royalties to the resource owner. buy refined products from the refiner and sell them to the end-use customer. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. As a general measure: Finding 2: 1996 average crude price. A modern refinery is a sophisticated work of engineering. heating fuels. is the provincial government. its predominant feature is the plant facility which. The focus of this study is on the marketing sector of the downstream petroleum industry.1 cents per litre. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. manufactures a range of refined petroleum products including gasolines. as a factor of the regular gasoline retail pump price. personnel. involving energy. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. or roughly 34 percent of the pump price. diesel. which in oil producing provinces such as Alberta. As is typical of many manufacturing organizations. and lubricants. This sector acquires crude oil.While some suggest that the price of gasoline should rise and fall exactly with the crude price. and hopefully realize some production. oil producers must explore for potential reserves. was 19. and marketers who. in the petroleum sector. and numerous safety and environmental safeguards. crude is only one of several factors that influence pump prices. drill for. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. day-to-day plant operations are cost-intensive. In addition.

the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. which may cause Gross Refiner Margin to be slightly overstated. transfer price . reflecting the cost of transporting the crude from the producing region to the refinery plant. being squeezed or expanded between these two price points. as this price point exists within the marketing sector. they use rack price as their basis. indicative of a competitive wholesale rack market.this is the “internal” price charged by a refiner to the marketing arm of the same company. but with no material effect upon the Gross Product Margin derivation.Price/Margin Model Elements For simplicity. This margin provides for plant operating costs as described above. Contract and transfer prices are not openly shared. there would be little or no market-driven competitiveness in the refiner sector. some clear competitiveness indicators exist. the relative competitive strength of any given rack market is difficult to assess. which provides an independent and objective determination of rack-based gross refiner margin. If for example. and a return on the considerable capital investment in the plant facility. contract price . In simple terms. 1 Dealer Price is not included here. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. 2 MJ ERVIN & ASSOCIATES 10 . rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. external measurement of the current market value of a particular petroleum product. Although contract and transfer prices are distinct from rack price. Of these three refiner prices. this model only uses the benchmark crude value. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. While refineries are always rack price points. For a competitive rack market to exist. Wholesale volume data is not readily available on a market-specific basis. as they relate to negotiated. refiners sell their product under a variety of arrangements. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. many of which do not have integral refineries. The existence of rack price in a given market is not of itself. In fact. Since both crude and rack prices fluctuate according to market forces. the gross refiner margin is the price at which the refiner sells its refined product. not the refiner sector. and accordingly.the price charged for immediate supply on an “as available” basis. the gross refiner margin is elastic. representing major Canadian population centres. For simplicity. which can be broadly categorized as follows1: • • • rack price . In fact the refiner typically pays a higher price than the benchmark crude price. On a national basis however. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. confidential terms between the seller and specific buyers. only rack price information is readily available in the public domain. since the market-driven rack price provides an objective. less the price at which it bought its raw material2 (rack price minus crude price).

market-driven Rack (wholesale) pricing of petroleum products. In practical terms. 1 Based on Octane Magazine Retail Outlet Survey data.for example. to major industrial consumers. Integrated Refiner-Marketers In Canada. MJ ERVIN & ASSOCIATES 11 . These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). As shown in Figure 15 (page 35). With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. in order to maintain realistic accountabilities within each of the two sub-sectors.000 km) for overland truck transport. but where pipeline or marine fuel terminal facilities exist. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. The mechanisms that drive rack prices are more fully discussed on page 36. In examining the structure of the Canadian refiner sector. who themselves do not refine petroleum products.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . In practice. to so-called “independent” petroleum marketers. many US and European refineries are in practice. Canadian refiners must therefore be price competitive not only with each other. who compete for a share of this demand. In these cases of so-called “integrated” refiner-marketers. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. as there is no obvious market mechanism to regulate its setting. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. the question of the internal selling price. arises. this limits a marketer to a relatively short range (perhaps 1. would produce better than expected refiner income. or close to. but with their US and European counterparts. and in the case of gasoline. due to the relatively small transportation cost. and which supply petroleum to about one-third of all retail outlets in Canada1. most refiners also participate in the marketing and retailing of petroleum products. from any one of several regional refiners. market-driven rack prices. wholesale refined product is bought and sold across very large distances. but at the expense of marketing income. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. even overseas. potential sources of wholesale product supply for most Canadian non-refiner marketers. or transfer price. petrochemical producers. integrated refiner-marketers establish transfer prices at. for example.

Within this industry sector. product is sold from a central facility. including mining. as a popular and relevant “window” on the petroleum marketing sector. home heating.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. trucking. or in the case of cardlock facilities. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. farming. and purchase at or near the established rack price. principally into commercial trucking operators’ vehicles. each with its own distinct infrastructure. Retail Sales to the domestic motorist. the most recognized element of the downstream oil industry. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. • • MJ ERVIN & ASSOCIATES 12 . and who essentially deal directly with the refiner. and aviation. Wholesale Sales to a wide variety of customers. It is this sector which has direct contact with the petroleum consumer and it is this sector. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. media and regulatory attention. in the minds of many consumers. gasoline price and competitiveness issues attract considerable public. For this reason. which “sets” the retail price of gasoline. Marketing operations within this sector can be broadly classified into three elements.

and regular gasoline in particular. Sales to major industrial accounts. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Retail outlets are operated in a variety of modes. Sales to spot buyers at posted rack price. Sales to non-refiner petroleum marketers. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. according to the contractual relationship between the supplier and the dealer. These outlets usually have considerable inventory capacity. There are about 16. to the aviation fuel consumer. and usually supply customers by delivery to the customer’s own storage tank.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. one final element of the pump price model must be reviewed. Sales of aviation fuels at major and secondary airports across Canada. as principal elements of petroleum marketing operations. Before examining this sector in detail. Sales of petroleum products (principally gasoline) through retail gasoline outlets. to the motorist consumer. often delivered by pipeline or ship/barge. Sales of petroleum products through bulk sales outlets. Sales of home heating fuels to residential furnace oil customers. at a negotiated contract price.500 retail gasoline outlets in Canada. as discussed. for example. by delivery tank truck. Direct sales generally do not involve any marketing sector infrastructure. heating fuel delivery is an integral part of a bulk sales outlet. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. using delivery tank trucks. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities.300 bulk sales outlets in Canada. In major centres dedicated Home Heat centres provide this service. such as product transport and/or storage. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are over 850 cardlock outlets in Canada. in smaller centres. which is generally less than the rack price. usually involving some aspect of the marketing sector infrastructure. MJ ERVIN & ASSOCIATES 13 . which primarily serve long-disttance truckers and commercial delivery and haulage operators. typically at the “rack point”. Sales to commercial and industrial accounts by the wholesale marketing sector. There are over 1.

in a small number of markets. or roughly 50 per cent of the pump price. regardless of market conditions. MJ ERVIN & ASSOCIATES 14 .2 cent (0. the tax content of the petroleum price is essentially a pre-determined. for example. which amount to 28. and seven percent GST. If the pump price decreases for example. A three-cent drop in pump price. Table 2 shows the provincial tax content for retail gasoline. PST).Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. municipal taxes.3 in Quebec) drop in the tax content. As part C of this study shows. The petroleum industry acts as a collector of these taxes. stable amount. would include a roughly 0. 1 Due to the application of GST (and in Quebec. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.6 cents per litre (Canada 1996 10-city average). the tax content of retail gasoline in Canada has increased steadily over several years. tax content does fluctuate somewhat with pump price changes. provincial sales tax. typically made up of: • • • • a ten cent per litre federal excise tax. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.

0 10.0 10.4 3.0 16.0 10.8 4. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 28.0 10.0 10.5 12.7 30.5 Total Tax 24.0 10.0 10.2 10.2 24.3 Federal Excise Tax 10.0 3.Table 2: Taxes on Regular Gasoline on December 31. Provincial Tax 11.0 3.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.6 22.5% sales tax applied to the GST-inclusive pump price. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.2 24.5 6. An additional pump tax of 1.6 3.8 note 1 note 2 An additional tax of 1.0 14.5 14.1 25.0 4.0 28.5 cents was introduced in the Montreal and surrounding area in 1996.3 10.6 3.0 10.0 10.6 25.7 3.0 10. MJ ERVIN & ASSOCIATES 15 .3 27. plus a 6.3 20. All Quebec gasoline sales are subject to a 15.0 15.5 cents and 4.0 11.1 32.2 cent per litre pump tax.0 9.6 3.5 3.9 3.0 10.7 13.0 GST content (7% of pump) 3.6 3.0 27.7 18.

Upstream operations realized 19.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. based on regular unleaded gasoline. It also provides an overview of the industry in terms of several infrastructure parameters.3 percent of the average regular gasoline posted pump price.8 ¢ TAX 28. operating modes. some profit return for the shareholder. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.6 cents per litre. and potentially. namely the dealer’s costs and income. including retail outlet distribution.1 ¢ 5.5 cents per litre (after freight cost). or 50. or 9 percent. to derive a representative value for regular gasoline gross product margin in Canada.3 ¢ 28. and the retail gasoline sub-sector in particular. the brand supplier’s costs.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. 3.3 cents per litre.5 ¢ 0. The residual.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.4 ¢ 19.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). was available for product marketing operations. this section provides a view of the Canadian petroleum marketing sector. or 34 percent of the pump price.2 ¢ 24. and ancillary operations. Figure 2: 1996 Average Prices/Margins . Refiner operations realized 5. MJ ERVIN & ASSOCIATES 16 . This 1 Prices and margins reflect a Canadian 10 city average.1 cents per litre.

gross product margin represented 6 percent of the Canadian average regular gasoline pump price. and is often out-sourced to third-party common carriers. this is seen as a “non-core” business. which in the case of retail gasoline. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. See page 10 for further explanation. the finished product (gasoline. is defined by the marketdriven price points of ex-tax pump price. was 5. three key findings can be stated: Finding 4: Finding 5: In 1996. Freight MJ ERVIN & ASSOCIATES 17 . Freight cost does not typically fluctuate.5 cents per litre. The marketing sector then. In 1996. is usually the gas station. In 1996. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. Although many petroleum marketers conduct their own freight operations. is the second of two elements of the downstream oil industry. Both refiner and marketing margins have been in decline over the past several years. and rack price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. and it is depicted in Figure 1 as a fixed cost element. and is then transported to the retail outlet. petroleum taxes accounted for 50.3 cents per litre. In referring to marketing margins and product margins.3 percent of the average urban price of regular gasoline in Canada. for example) is sold/transferred at the current rack or transfer price. was 3. As the product leaves the refinery plant. Based on the 1996 data. or “rack to retail” margin. as part C will describe. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. it falls into the domain of the marketing sector. Bloomberg rack price values were used as the assumed wholesale price. The gross marketing margin.

This is a particularly useful measurement in comparing retail gasoline markets. storing and dispensing a product such as gasoline adds considerably to the operating cost.000 per outlet.6¢ Refiner Operations 5. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. As represented in Figure 3.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. petroleum marketers. as it represents 80% of all retail gasoline sales. as it excludes the “outside variables” of tax. together with gas station dealers. typical of any retail business. • Product sales: Within this domain. freight. Figure 3: 1996 Average Regular Gasoline Margins (56. Unlike most other retail enterprises however. which are typically close to a wholesale rack point. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. and upstream/refiner margins.8¢ Pump Price) Upstream Operations 19.1¢ Tax 28.costs are generally less than one-half cent per litre in most major Canadian cities. and is therefore a poor comparative tool. rural markets experience higher pump prices than do larger centres. but at an average cost of over $200. an average gross product margin for regular gasoline in a major Canadian city was 3.5¢ Product Operations Freight 0. Gross product margin is therefore defined as gross marketing margin less freight cost.5 cents per litre in 1996.3¢ 3. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). incur a variety of costs. Posted pump price includes all of these variables.

expanded product/services offerings such as convenience items. a number of factors preclude this type of strategy. and accordingly. page 24). one must ask how marketers compete. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. but most consumers view gasoline as a commodity. 1960) MJ ERVIN & ASSOCIATES 19 . and Promotion. it represents a very small percentage of total retail petroleum sales. marketers compete to be represented in as many and/or the best locations as possible. This study does not examine such a broad issue however. additives. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. but in 1995 was typically 5 cents per litre for midgrade. Today. 1971).). Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Ill. etc. rather than the most places. • Product In the past decade.” or four P’s: Product. Higher octane grades are more expensive than RUL. Although revenue from this product is factored into the study market economics in Part D. or when comparing price levels between markets. and 9 cents per litre for premium gasoline. p. 2 E. Today. Price competition has forced marketers to optimize outlet revenue. Place Typically. will ultimately purchase based on price. commonly known as the “marketing mix2. Simply put.retail gasoline sales respectively1. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. gasoline). seasonal blends. marketers compete for the consumer’s choice of transportation energy (for example. A portion of the market certainly responds to this type of competitive strategy. marketers have attempted with some success to differentiate their product offerings from other brands. Jerome McCarthy. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. 4th Ed.: Richard D. Place. Basic Marketing: A Managerial Approach. propane vs. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. In order to measure competitiveness. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. and the price difference between these grades and the RUL price is referred to as the grade differential. 1 Diesel is another petroleum product sold at many retail outlets.44 (1st Dec. Irving. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. (Homewood. Price. The grade differential varies somewhat from city to city. RUL prices are therefore most often cited when relating historical price trends.. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. competitive strategy of this type focuses heavily on selecting the best place. as gas stations proliferated.

free item with purchase or special price item with purchase. Consequently.• • closure of non-viable outlets. uniform prices . volatile prices . gasoline is a commodity. and due to the already slim margins available to marketers. their subsector margins. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. due to the largely commodity nature of petroleum product.while uniform pump prices are sometimes cited as evidence of industry collusion. Examples are: • prominently displayed prices . This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. volatile pricing manifests itself in the form of a price war (see below). probably due to its relatively high cost. low prices and/or margins. At its extreme. MJ ERVIN & ASSOCIATES 20 . Promotion In the gasoline retailing sub-sector. and more importantly. gasoline is viewed by consumers as a commodity uniform in quality and widely available. is less clear. This study presents an extensive historical and comparative analysis of pump prices. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. As such. this study examines the dynamics of price competition in considerable detail. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. • • • While examples of all of these indicators are abundantly in evidence. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Promotional activity seems to have decreased in the past few years. fluctuating pump prices are a significant indicator of robust competition among marketers. caused by price competition. In this context.contrary to some public perception. price has proven to be the most widely used competitive tool by gasoline marketers. Examples of promotional competition are: • • • brand identity gasoline discount coupon. • Price In most markets. Establishing an objective measurement of price as a competitiveness indicator however. and therefore “trades” within a relatively narrow price range.

its effect is to restore some measure of the dealer margin. assuming that the rack price is unchanged. are indicators of a competitive market. Price Support In times of “normal” pump prices. but to competitors. in an attempt to gain market share. and provide to the dealer what is commonly referred to as price support. or even undercut the competitor’s lower price. If the posted price increase is too high. This is a misconception. adjacent dealers. When this occurs. 1 This does not occur at company operated or commission outlets. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. Pump prices therefore tend to move uniformly within a very short time. Whether through falling pump prices or rising rack prices. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. Pump price signs are an ubiquitous feature of the retail gasoline industry. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. or even being squeezed to zero . competitors may not follow. In the case of lessee or independent dealers however. or when prices rise or fall apparently in unison. obviously at the expense of the supplier margin. since they too must restore their gross product margins to sustainable levels. the supplier may temporarily intervene. in order to maintain a reasonable market share. Finding 7: Price uniformity and price volatility. the effect on many consumers is immediate: they will drive into that station. While this support may take one of several forms. To understand the phenomenon of uniform pump prices. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. one must adopt the perspectives of both consumers and competing. The other dealer has little choice but to quickly match. The effect of this upon the gross marketing margin is obvious: it is squeezed. for example).When pump prices are uniform. facilitated through street price signs. MJ ERVIN & ASSOCIATES 21 . or even less than. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. the relationship between the supplier and dealer is generally as described on page 25. bypassing the higherpriced outlet. the wholesale rack price. If one dealer decides to reduce pump prices (by two cents. since there is no “dealer margin”.where the ex-tax pump price is equal to. who then react quickly to the change. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. competitors will likely match this price.

the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18.Under the provisions of some price support mechanisms. Following a year-long investigation. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. An examination of the effect of the Competition Act. however. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. the petroleum marketing sector has been the subject of several inquiries at federal. which is administered by the federal Competition Bureau (Industry Canada). The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. is beyond this study’s scope. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. the Bureau found that there was no evidence to support these allegations1. control over retail pump price effectively reverts to the supplier. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. In addition. but reverts back to the dealer when the support arrangement is ceased. or of direct government intervention in marketing. and a brief discussion of this case appears in part D. A review of historical retail pump prices in the Halifax. provincial and even municipal levels. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. In addition. resulting in 9 convictions. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. There are few current examples of direct government intervention in the pricing of petroleum products. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. More recently. While this study does not intend to undertake a detailed review of the effect of the Act. These cases have largely involved local dealers and/or isolated incidents. 1997 MJ ERVIN & ASSOCIATES 22 .

it is clear that government policy plays an important role in facilitating. MJ ERVIN & ASSOCIATES 23 . creates an obstacle to. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. A practice. Many smaller retail owner-operators.500 retail gasoline outlets across Canada. or inhibiting. but exist to meet other important societal needs. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. This issue is discussed more fully in part D. to some degree. creating a need for higher margins. entry into an attractive market. Retail gasoline sales. it is the single largest one. that is. So defined. promotes or limits market-driven pump prices. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. as outlined above. and is the single largest market for gasoline products. particularly in smaller population centres. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. and consequently. These regulations clearly exist to the benefit of all. As a product group however. exit from an non-viable market.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. for safety and environmental protection. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. and at least some of this capital cost is regulatory compliance-driven. in the form of standards for the decommissioning of retail petroleum sites. or incentive for. accounts for about 37% of all refined petroleum demand in Canada. is in part. The high cost of building a modern retail gasoline outlet for example. Conversely. or incentive for. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). a competitive climate. accounting for roughly 88% of all gasoline demand. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. accounting for 41% of all petroleum demand. one can cite examples of regulatory obstacles to exit from the retail gasoline market. It is important to acknowledge that many regulations affecting the retail gasoline industry. sales of gasoline through the roughly 16. higher pump prices. inhibit competition.

2% Other 0.it has no practical means to enumerate each and every outlet. Figure 5: Canadian Retail Outlet Population . This study provides an estimate of the actual retail outlet population.9% Diesel Fuel 22. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.7% Light/Heavy FuelOils 14.2% Propane /Butane 2.7% Lube/Grease 1. as shown in Figure 5.2% Asphalt/Coke 4.2% Retail Gasoline 37.9% PetroChem Feedstocks 5.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This survey accounts only for major established retail networks .452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.6% Other Gasoline 4.3% Total Sales Volume: 84.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .

500 in 1995. the retail outlet is owned and operated entirely by the product supplier. Several possible relationships. controls the setting of the pump price. and the dealer.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. using Octane counts only) is roughly equivalent to population densities. as one might expect. and usually owns the brand name seen at the retail outlet. The supplier. or modes. who holds initial title to the refined petroleum as it leaves the rack point. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . exist between retail dealers and their suppliers. The principal dealer and attendants are salaried employees of the supplier. Distribution of these outlets by province (Figure 6. to about 16. and all inventory and revenues belong to the supplier.000 outlets in 1989. who manages the day-to-day operations at the retail outlet. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. as owner of the product.The estimated number of retail outlets in Canada has declined from 22. and this is of some importance with respect to the matter of prices and competition in this sector. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.

and pays them from his commission revenue.sub-component margins . Control of Pump Price Dealer Compensation supplier a commission from the supplier. The “dealer” is in essence. usually based on cents per litre of petroleum sales. the supplier retains control of the retail pump price. an employee of the supplier supplier supplier typically the dealer. The dealer in turn hires attendants. who pays all outlet operating costs. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. but the outlet operator (“dealer”) is compensated by a commission payment. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. based on pump sales volume. the outlet facilities and petroleum inventory is owned by the supplier.the entire gross product margin accrues to the brand supplier. Since the supplier owns the petroleum product at this type of outlet. supplier salary from supplier.

The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and sells at the posted pump price. dealer-established retail price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. less the Dealer (wholesale) Price charged by the brand supplier. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and has control over the retail pump price. This Dealer Price. unlike rack or pump prices. since it is predicated on contractual arrangements between the dealer and the supplier. This dealer margin is defined as the pump price (ex-tax). The dealer pays most or all of the expenses associated with operating the outlet. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. MJ ERVIN & ASSOCIATES 27 . and means of compensation supplier. not the supplier. the retail facilities are owned by the dealer. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee.product from the supplier at a “Dealer Wholesale” price. The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and sells at the posted pump price. can vary considerably from one supplier to another. The margin between these two prices is the dealer’s gross revenue.

MJ ERVIN & ASSOCIATES 28 . 1 Unless the dealer is under a price support arrangement (for instance. and fully two-thirds operate as lessees or independents. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. In addition. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Petro-Canada. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. some general figures are mentioned here. during a price war) as previously described. virtually none of the major integrated outlets are company operated. or Imperial Oil). Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. who themselves establish pump prices. The remainder represent one of over 50 different marketer organizations.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets.

reduced petroleum margins. and is a result of. Figure 8 depicts the Canadian representation of several key ancillary services. feature both a large-area convenience food store and a modern car wash facility. these study findings show that this can vary widely from market to market. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Most ancillary services are operated by the dealer/lessee. has had a profound effect on the retail gasoline marketing sector. Improved outlet revenue from ancillary operations has caused.5 million litres. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. average annual throughputs ranged from under 1 million litres in smaller population centres. Canadian throughputs have dramatically improved in the past several years . to over five million litres in major markets such as Toronto. In effect. which in part has led to a reduction in retail product margins.While an average outlet throughput may be in the order of 2. Many outlets have more than one ancillary offering: many “flagship” outlets for example.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Based on a sampling of outlets surveyed in this study. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. ancillary service has had the consequence of subsidizing the pump price of gasoline. These improved outlet throughputs have provided for improved petroleum revenue potential. more fully described in part C. In fact.

Unless noted. This part examines broad trends in several areas. MJ ERVIN & ASSOCIATES 30 . prices are for regular unleaded (RUL) gasoline. An “all markets” average. using a Canada 10city weighted (by provincial demand) average. As such. an examination of the specific historical record of gasoline prices is useful. particularly around 1990. many utilize terms which are explained in part A. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. This shows that pump prices have increased in nominal terms. Since 1 Data is not regularly collected on smaller markets. including smaller markets. mainly using Canada average values. While some of the presented findings are selfexplanatory. the “Canada average” price reflects an average of urban markets only1. Since rising prices are common to most consumer goods and services. when the Persian Gulf War caused crude prices to increase significantly. and with which the reader should be familiar. as can be seen in part D of this study. Regional and market-to-market comparisons are presented in greater detail in part D. would be somewhat higher. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising.

When pump prices are reduced by the amount of tax content. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). It also depicts the associated margins. In constant dollars. When compared to other consumer goods.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. MJ ERVIN & ASSOCIATES 31 . nominal pump prices decreased. as in Figure 10. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs.1990. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. rack price. as defined in part A of this study. ex-tax equivalent prices. and relative crude cost. Figure 10: CPI Index Comparison . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes.

as shown in Figure 12. and the rise in the tax content. it is also useful to examine the behavior of margins. which in turn. as Figure 11 shows. are principally a reflection of changes in the underlying price of crude oil. MJ ERVIN & ASSOCIATES 32 . If.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as might be suggested. Margin History While Figure 11 provides an indication of key price trends. as the next section shows. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. then one might expect margins to be quite constant over time. Figure 12 shows that industry margins have not been constant over time. due to additional market factors which affect pump and rack prices at any given point in time. and in fact have displayed a declining trend over the past six years. it simply passes on a fixed cost margin to determine the “correct” pump price. It is important to state that pump price changes do not occur in exact lock-step with rack prices. which are defined by the price points. the presence of these additional market factors have operated to the benefit of consumers. In fact. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. and have risen slightly since 1994. nor do rack prices exactly follow crude costs. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. that is. the downstream industry operates on a “cost-plus” basis.

rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. as local competitive factors act to self-regulate pump prices.crude) 5¢ Marketing Margin (retail . including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. compared to the Canadian average. The decline in refiner and marketing margins has both resulted in. since the chart is based on monthly averages. Finding 13: From 1991 to 1996. not weekly or daily data. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. In particular. the actual fluctuation is much more pronounced than shown. MJ ERVIN & ASSOCIATES 33 . which have both shown a consistent decline throughout the period 1991 to 1996. and has been a result of. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. This shows that on a monthly basis. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . A more thorough discussion of specific market factors for these and other centres appears in part D.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. this upward trend is not attributable to “downstream” refiner or marketing sector margins. several factors. 1 In fact. the gross marketing margin can fluctuate quite significantly1.

is presented in Figure 14.Figure 13: Monthly Gross Marketing Margins. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . although Canadian pump prices in urban markets are clearly higher than in the US. resulting in significantly higher Canadian gasoline prices. On an ex-tax basis. US Price History The retail gasoline tax structure in Canada is vastly different than the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. US pump prices. This difference accounts for most. A comparison of Canadian and US regular gasoline pump prices. or even less than. for several years. if not all of the difference in pump prices between Canada and the US. Canadian pump prices have been roughly equal to. this is wholly attributable to the difference in taxation. with and without tax. This shows that.

From this it can be seen that Canadian and US rack prices. • Although this study shows that on an ex-tax basis. While these trends have also occurred in the US. Figure 15 compares these values for selected Canadian and US centres over a period of several years. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. Canadian outlet throughputs (although likely still less than those of the US). both a cause and an effect of improved throughputs and ancillary revenues as previously described. Prior to 1994. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. and moving up or down more or less in unison. which is reflected in US average pump prices. behave in a very similar fashion. This is no longer the case however. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. This would be a useful area for further research. page 24) and somewhat increased demand. Canadian ex-tax pump prices were historically somewhat higher than in the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. trading at any given time within a relatively narrow (about 2 cents per litre) range. RFG has not been introduced to Canadian markets. when compared on an ex-tax basis. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . have improved considerably. as a result of outlet closures (see Figure 5.

a “buyers market” develops.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. not only in a given market. albeit less distinct pattern. conditions begin to favour a “seller’s market”.700.500. As non-refiner marketers attempt to secure a supply of this diminishing inventory.000 2.500. Pump Price (nominal ¢/litre) 3.000 24¢ 1. or indeed anywhere.900. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.900. Simply put.000 34¢ 2. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. rising and falling closely in step with demand. Figure 16: Monthly Demand vs.000 2. and as would be expected in any commodities market under these conditions.700. as demand ebbs and inventory improves.300. Demand vs.000 1. Gasoline price exhibits a similar.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. Gasoline demand exhibits a very regular seasonal pattern.100. but in fact across the North American continent (US demand follows a similar pattern). Yet in the latter half of each year. and prices tend to fall. and falling in the latter half of each year. increasing significantly every spring.000 1. of motor gasolines from 1991 to 1996. the price tends to be bid upwards. or sales. Price History Figure 16 shows the history of Canadian gasoline demand.100.000 2. compared to average ex-tax regular gasoline pump price for the same period. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 2. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).

This is of course. has operated in a highly competitive environment. despite a rise in demand. gasoline prices have not followed the traditional model. the essence of a free market economy.Whether in the spring or the fall. a feature of most marketregulated commerce. so do prices. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. the downstream petroleum industry. The traditional supply-demand model predicts that when demand rises. MJ ERVIN & ASSOCIATES 37 . their related product costs and margins. This part of the study presented a number of historical views of retail gasoline prices. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. Figure 16 shows that from 1991 to 1995. and product taxes which add to the consumer price of gasoline. in that prices have fallen. as evidenced by declining industry margins. demand rose approximately 8. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. which ensures a competitive product price for buyer and seller alike. pump prices have increased due to a significant rise in crude costs in this period).3%. All of the findings suggest that. while average ex-tax pump price declined by 14% (since 1994. On a long-term basis however. competing to meet their own needs. while world crude prices and Canadian taxes have generally increased over the past several years. which consists of the refiners and marketers of gasoline and other petroleum products.

which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. ancillary revenues. namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. there is no regular monitoring of pump prices in smaller centres. although one was subsequently dropped due to insufficient submitted data. and in order to provide insights into the range of competitive dynamics that may exist. outlet costs.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. play a role in a market’s pump price. • Methodology Selection of Markets A number of markets were selected for the study. and pump prices alone provide very little opportunity for “comparability”. outlet volumes.. is useful in providing broad overviews of industry price and margin trends. A number of factors such as taxes. Nineteen markets were therefore adopted for the study (Table 3). so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. freight. MJ ERVIN & ASSOCIATES 38 . Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. etc.

Ontario.are influenced not by one. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. retail pump prices . Process Overview As illustrated in part A. To examine the competitiveness of the marketing. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet.000.and consequently competitiveness . or “rack to retail” sector. the gross marketing 1 Although White Rock is clearly not a major centre by itself. In all.Each market was classified according to regional affiliation (BC/Prairie. MJ ERVIN & ASSOCIATES 39 . 2 Depending upon the outlet mode. Suncor Inc. Shell Canada. To this end. these organizations provided market-level data on freight costs. In addition. it was essential to obtain data not normally available through existing public sources. and Canadian Tire Petroleum. Five companies responded to this request: Imperial Oil.. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.0001. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. price history data not available through public sources. retail outlet and brand representation. but a number of variables. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. the gross marketing margin must be examined in isolation from those other variables. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Petro-Canada. and Group B markets less than 500. Furthermore. and for smaller markets.

The variables of tax content. From participant company supplied data. The gross product margin thus serves as an interim basis for comparing study markets. these were weighted by volume. in addition to operating cost and ancillary revenue data gathered in the study1. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. rack price. This allows for an accurate determination of net outlet revenue. and freight. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). and freight were successively removed from the pump price. weighted by sales demand. to derive the 1995 average gross product margin for each of the study markets. 2. tax content. MJ ERVIN & ASSOCIATES 40 . rack price. Where applicable. Group B (smaller market) and 19-market study averages. including some smaller centres. Where differences in gross product margin might still exist. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. 1 Although outlet cost and ancillary revenue data was not available for all markets. Finally. 1995 average values were determined for pump price. For each market.margin is stripped of its freight component. a market-by-market profile of outlet income is presented. average outlet annual throughput was determined for each market. to arrive at “blended” values2. Using the derived gross product margins and volumes for each market. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. as the “blended” price includes other product grades. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. by product grade. average pump prices are higher than actual average regular gasoline prices. 3. and the final “rationalized” gross product margin was determined for each market. 2 Accordingly. a broad representation of markets was possible.

it is important to understand that the use of rack price in this analysis has certain implications. Unlike retail pump prices however. Bloomberg rack price values were used as the assumed wholesale price. represent a broad range of markets.. or consolidated net incomes. . but they are relatively minor..7 million. This variation is constant across all nineteen markets however. objective data exist for both of these values. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain.4. as described on page 10. The derived weighted average values of pump price. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. 6. a recognized source of data on world crude oil and petroleum markets and prices.. and therefore where assumptions were made. and from one brand to another. and gross product margins are therefore likely to be understated. freight. so that on a cents-per-litre basis. perhaps by 1 to 2 cents per litre. accurate comparisons are possible. and outlet operating costs were deducted from total revenue. A dollar-per-outlet estimate of these elements was made. encompassing a significant portion of the entire Canadian market.. From participant company data. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. Supplier Overhead costs. MJ ERVIN & ASSOCIATES 41 . Also. 7. petroleum revenues. many wholesale petroleum purchases are made at less than the “posted” rack price. also considering that RUL constitutes the majority of product. average revenues from ancillary services were added. 5. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. these 19 markets represent a combined population base of 8. including relatively smaller ones such as Sioux Lookout or Gaspé. and supplier profit. grade differentials were based on known differentials of nearby markets. and accordingly represent a broad spectrum of consumers and marketers. marketing margin. the effect on the “blended price” is small. Interpretation of Data In some smaller centres. In referring to marketing margins. When these margins are applied to outlet throughputs as in step 4 above. These differentials do vary from one market to another.to determine average consolidated net revenue per outlet. Wholesale refined product prices used in this study are therefore likely to be overstated. product margins. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price.. While clear. etc. This value was then applied to the gross product margin to determine average outlet petroleum revenue.

The first of these variables to be examined is tax. accurate. there is little to suggest why such a high variance exists. MJ ERVIN & ASSOCIATES 42 . The 19-market study group exhibited a statistical variance1 of 17.38 cents per litre in ex-tax pump price. table J for an explanation of how variance is derived. The data also shows that typically.64 cents per litre in pump price. independently gathered data. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.8 cent difference in pump price 1 See footnote at Appendix II. but a variance of only 12.Rack prices used in this study are nevertheless market-driven. The study data suggests that variations in tax rates account for a significant part of pump price differences. and based on objective. higher priced markets are associated with smaller population centres. while lower prices tended to prevail in major centres. broken into tax and extax components. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The data shows a statistical pump price variance of over 17 cents per litre within this study group. Tax Figure 19 shows posted pump prices for the study markets. A 6.

1 Due to pump price differences. This eliminates any effect that tax variability may have. MJ ERVIN & ASSOCIATES 43 .tax. it is therefore more useful to use ex-tax pump prices when comparing any two markets.between Calgary and Vancouver for example. In all study markets. Montreal). The data shows that taxation between markets within the same province varies little. but the variance is minimal .while all markets are subject to the same rate of federal excise tax and GST1. GST content can vary by market. or when examining historical price trends. when examined on an ex-tax basis. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. additional elements of the revenue stream must be further isolated. as described in part A. thus providing a better basis for comparison. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity.less than one-half cent per litre. Figure 19: Pump Price . Upstream and Gross Refiner Margins Although the deduction of tax content is useful.75 cents per litre (Vancouver. accounting for roughly half of the average retail price. namely the upstream industry and refiner sector. was less than three cents. while taxation between provinces is more pronounced . taxes were a significant element of pump price. provincial tax rates can vary greatly. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry.

in the case of Thompson). the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. as this would cause rack buyers to bring product in from the lower-priced region . Furthermore. When rack price is deducted from the ex-tax pump price. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. and therefore are best analyzed separately. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. rack price) and gross marketing margin elements. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. MJ ERVIN & ASSOCIATES Cents per litre 44 . the rack price is equivalent to the upstream margin plus the refiner’s margin. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. reflecting the reality that at the rack level of competition. the rack price is set at the rack point (Winnipeg. Freight costs are additional. This is due to the fact that for any market. To address this. reflecting some differences in refinery crude acquisition costs. rack and pump prices. as is examined below. but ultimately. the validity of analyzing gross marketing margins in isolation might be raised.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. differ little from those of major centres. are clearly delineated by market-driven crude. and their respective margins.assuming transport costs did not outweigh the price difference. it should be restated that each of these sectors. if a clear understanding is to be achieved. one region cannot maintain rack prices at a higher level than another.

and therefore a significant pump price factor. To provide a comparative view of the marketing dynamics within the study group. as low as 0.16 cents per litre (gross marketing margin) to 7. Although freight operations are often an integral part of many petroleum marketing operations. this freight cost is almost negligible.0 cents per litre. MJ ERVIN & ASSOCIATES 45 .Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector.3 cents per litre. remote population centres. For other. For markets which are also established as rack points. it is therefore important to eliminate the freight variable from the gross marketing margin. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. Two of the study markets had freight costs in excess of 3. particularly in comparisons of major urban markets to small. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. resulting in comparative gross product margins. Before using this as an analytical tool however. generally smaller markets. one final outside variable must be isolated: that of product freight. in fact. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. with their component freight costs. it is essentially a “non-core” business. Figure 21 shows a study market comparison of gross marketing margins.49 cents per litre (gross product margin). the data shows that freight is often a significant part of the gross marketing margin. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies.

Gaspé. or consolidated net incomes. Bloomberg rack price values were used as the assumed wholesale price. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. to the resultant retail gross product margin .22 cents per litre Smaller markets showed a wider variance in gross product margin .6 cents) to the variance in their component gross product margins (7.6. For all study markets. Group A (larger population) markets averaged 5.5 cents per litre average Gross Product Margin cited in Part B.68 cents per litre1. petroleum revenues. while Toronto. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. at 3.42 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets .68 cents per litre. product margins. was the lowest.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.5 cent variance in gross product margin is still significant however. as the 3. 1995 gross product margin averaged 5. MJ ERVIN & ASSOCIATES 46 . or between any two regions.the gross revenue available to the petroleum marketing sector for its operations.17 cents per litre. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.06 cents per litre.a variance of only 2.95 cents per litre. was the highest of the study group.5 cents). while Group B markets averaged 7. at 14. A 7.5 cent per litre average relates to regular gasoline in major markets. In referring to marketing margins.

000 1.000 Litres 3.14. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000. Figure 23: Average Annual Throughput per Outlet 6. an examination of related outlet throughput volumes is necessary. If these two factors are related to each other as they are in Figure 24. a wide range of variability still exists between markets in the study group . 3.000 5. sold significantly less than 5 million litres of petroleum per year.1 cents per litre in Toronto.000. for example.000 litres per year (Toronto). it would likely be so unprofitable as to be un-viable. vs. once isolating retail gross product margin from all of the “outside” pump price factors.000. if any retail gasoline outlet located in the Toronto area for example.000.000.differences between markets. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000 2. ranging from under 700.000 4. Indeed. A wide range of volume performance is evident.000. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 litres per year (Sioux Lookout) to over 5. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . To understand why such a wide range of margins can exist after eliminating all tax and freight variables.2 cents per litre in Gaspé.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000.

With few exceptions.000.6624 1.95 cents). all market groups (BC/Prairie. while those with high Gross Product Margins tend to have low outlet throughputs. Smaller markets perform as competitively as larger centres.6634Ln(x) + 76.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.7 million respectively. Ontario. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 3. If all outlets in a given market experience generally low throughputs. not of poor competition. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. Regionally. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.4 million litres annually.Figure 24: Outlet Volume vs. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.000.962 R2 = 0.42 cents) than smaller (Group B) population centres (7. On average however.000 Volume (litres) 4. the Group A market outlets had roughly 50% more throughput than Group B outlets . it follows that higher gross product margins will be the consequence.000.000.000. As most outlet operating cost are fixed in nature . Although MJ ERVIN & ASSOCIATES 48 .000. they remain essentially the same regardless of volume changes .that is. compared to 2.000 5.000 2.000 6.

such as convenience stores. and incur many expenses in the course of their commerce. supplier overhead costs. Ancillary revenues are those derived from non-petroleum sales sources.000 5. as described below.000. two additional factors are introduced: ancillary revenue and outlet operating costs. product cost. and must be examined. is only a measure of petroleum revenue per litre. Figure 25: Outlet / Volume Relationship . this is likely due to the higher incidence of Group B study markets within this region.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences.000 6. In reality. competitiveness occurs between retail outlets. which for the study group.716 . It represents the residual revenue which is available to the dealer and to the supplier.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. ancillary sales. and ultimately shows that very little difference in competitiveness exists between any two markets. These additional factors clearly have an effect on the relative competitiveness of retail markets.000. and supplier MJ ERVIN & ASSOCIATES 49 . in addition to petroleum sales. averaged $69. and auto service. Figure 26 summarizes total outlet petroleum sales. while operating costs are those costs which are directly incurred in the operation of the retail facility. and the resultant consolidated net revenue.000 2. outlet-based view of retail markets.000.the revenue available for dealer income.000.000 3. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). however. supplement their incomes with other revenues.000. car wash. less outlet costs. Gross product margin. which.000 4. Consolidated Net Revenue per Outlet To create a complete.000.

000 $100. these ancillary operations contributed to a lower product margin and consequently. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.000) $(300.000 $50.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.profits.000 vs.000) $(150. Most markets showed relatively similar net revenues (see Appendix II. A discussion of the ultimate distribution of this revenue is useful. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . As described above. Figure 26: Outlet Revenues. and his personal labour investment.000) $(350. causing the weighted average for Quebec / Atlantic to be depressed). Income BC/PR $300. reduced pump prices. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Table K).000) $(250. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. as explained below.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Costs.000 per year respectively . petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000 $150.Group B outlets were not as profitable as these revenue values might suggest. which reflects his investment in the outlet. In effect. Finding 19: Based on published rack prices.$154. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. MJ ERVIN & ASSOCIATES 50 .000) $(100. An examination of these component elements reveals a significant finding: that for most markets. $60.000 $250. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(200.000 $200.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. and with access to wholesale product by several means.38 ¢ 7.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. but well within a cluster of markets with similar throughputs. Geographic / Supply / Freight cost considerations: As a port city. contributing to a higher than average pump price. as described below. and also has local refining capacity. Vancouver is also a terminal for a refined products pipeline from Edmonton. this market has access to numerous refiners along the Pacific coast through marine supply.000 barrel per day plant located in the greater Vancouver area. Influence of other markets: Although relatively close to the US border.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.968 litres 7. This may explain the somewhat elevated gross product margin in this market. The somewhat high margin placed this market slightly above. Vancouver provides several perspectives into retail marketing.542. Vancouver collects a 4 cent per litre municipal tax.000 1. Low consolidated net revenues may have contributed to the higher margin.98 ¢ 0. net outlet revenues were less than those of other major centres.658. ranking 11th. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Figure 28: Vancouver . a 60. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Overall.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price .Vancouver population # of brands # of outlets outlets per 10.745 18 446 2. while average throughput ranked 4th. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.ex tax Canada Average .

this market is subject to a 4 cent per litre municipal tax. This market is close to its usual rack point.630 litres 7.000 16.White Rock population # of brands # of outlets outlets per 10. Like Vancouver. Average outlet throughputs were relatively high. prices in this market have historically mirrored those of Vancouver. Freight costs were accordingly low compared to other small markets in this study. or competitive dynamics. Geographic / Supply / Freight cost considerations:. due to its proximity to one.98 ¢ 0. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. the White Rock retail gasoline market displayed the same attributes as a major urban market. the study data found little to suggest a material effect upon representation. gasoline “cross-border shopping” is less pronounced than might be expected. at least in this market. Influence of other markets: Although this market is a border-crossing community.315 4 8 4.45 ¢ 7. adjacent to the United States border. Price history / Taxation: Although no specific data is available. Vancouver. White Rock’s margin was typical of markets with similar outlet throughputs.604. but less than most markets with a small population base. This suggests that. MJ ERVIN & ASSOCIATES 55 . prices. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Despite its relatively small size.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. White Rock is essentially part of a major market due to its proximity to Vancouver. In all respects. and retail gross product margin was less than that of markets with a similar population base. thus providing some unique characteristics for the market study. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. This is likely due to the fact that unlike many smaller markets.

Calgary pump prices are very close to the Canadian average. Calgary is of sufficient size to support a viable rack market.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. indicative of a strong competitive climate. Price history / Taxation: As the figure below shows. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. pump prices in this market have historically been well below the Canadian 10-city average. Rack-to-outlet freight costs are among the lowest in the study group. Indeed.000 710. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Figure 29: Calgary .24 ¢ 6.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .47 ¢ 0. creating some competitive pressures (see Nanton).Calgary population # of brands # of outlets outlets per 10. which was one reason for selecting Calgary as a study market. Product is usually sourced from Edmonton refineries via pipeline. Influence of other markets: Calgary is fairly remote from US and other major markets.719 litres 6.827.ex tax Canada Average .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Some smaller markets in the vicinity have occasionally priced below Calgary.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Calgary had the third highest number of retail brands. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Consolidated net revenue: was typical of other major markets in the study group. Other considerations: Of the markets studied.675 27 313 4. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.

Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. Since 1993. margins and throughputs were typical of other markets with a similar population base. and this market is now more typical of other large population centres.000 179. Regina was of some interest as a study market. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Consolidated net revenue: was typical of other similar markets. and is therefore a recognized rack pricing point. Since then. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.794 litres 7. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. This is partly due to provincial taxation levels.180 15 86 4. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Influence of other markets: Like Calgary. and a history of volatile pump prices.Regina population # of brands # of outlets outlets per 10.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and therefore experiences no particular influences from any other major market. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. price volatility has eased. it is likely that this reflected a surplus of wholesale inventory within the local market or region.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Ex-tax prices are also above average. Figure 30: Regina .extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 .Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . supply/demand is likely more balanced.50 ¢ 0. this market is removed from other significant markets.089. which are among the highest in Canada.21 ¢ 7. Although no supporting data is available.ex tax Canada Average .

790 17 261 4.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. it is an established rack price point. Consolidated net revenue: No ancillary or outlet cost data was available for this market.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. On an ex-tax basis. Since then. although there is no study data to support this. this market has exhibited relatively stable pricing. and has remained very close to the Canadian 10-city average. although.000 616.ex tax Canada Average .22 ¢ 7. This may reflect a lower than average Consolidated Net Income.217 litres 8. this market is removed from other significant markets. Figure 31: Winnipeg . Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . though somewhat higher than average ex-tax pump prices. probably related to a regional surplus of wholesale inventory (see Regina). Price history / Taxation: In the early 1990’s this market experienced some price war activity. and therefore experiences no particular influences from any other major market. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.06 ¢ 0. possibly due to modest ancillary revenue.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . like most markets of this population density. prices have tended to stay somewhat above the Canadian average. Influence of other markets: Like Calgary.265.Winnipeg population # of brands # of outlets outlets per 10.

more isolated small-town markets. Consolidated net revenue: No Ancillary or cost data was available. Influence of other markets:. due to its proximity to one.585 4 5 31. Price history / Taxation: In order to attract market share beyond simply the local population. in order to maintain a share of the considerable potential sales revenue that passes through this market. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . situated on a major North-South highway to the United States Among the study group. Nanton was the smallest market in terms of population. While these conditions would normally result in a high gross product margin. In this respect.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. although not as low as expected. Despite its small size. Nanton had a high number of per capita outlets . Nanton has traditionally priced either at or below Calgary. placing Nanton well below the expected margin. Alberta population # of brands # of outlets outlets per 10. Nanton appeared to benchmark its pump prices to those of Calgary. the Nanton retail gasoline market displayed the same price attributes as a major urban market. a feature not available to other.000 litres 5. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.and a low average outlet throughput. it is likely that low operating costs. Average outlet throughputs were relatively low.600.000 1.41 ¢ 5.91 ¢ 0. Unlike many of the smaller markets in this study group. this market has a relatively low freight overhead. Nanton was perhaps the least viable market in the study group. and perhaps healthy ancillary sales associated with highway traffic. in terms of expected petroleum revenues. MJ ERVIN & ASSOCIATES 59 . would have an offsetting effect. as Figure 24 shows.far in excess of what would be expected of a community with a population of 1. Due to its highway location and its proximity to Calgary. Nanton had the second lowest gross product margin of the study group.Nanton. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. the retail gasoline market in Nanton was not restricted to the local population.the highest of the entire group .071. while others experience consistently high prices. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume.

they were comparable to other markets with similar average throughputs. though fairly typical of many smaller. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. this market has little or no influence upon. and due to its isolated locale in northern Alberta.6 cents per litre. and was accordingly chosen as a study market. Supply is via tanker truck from Edmonton.6 ¢ 10. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. nor is it influenced by.157. MJ ERVIN & ASSOCIATES 60 . Alberta population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.623 litres 12. high pump prices. isolated markets. isolated markets. In contrast to Nanton. Peace River also experiences high freight costs. further adding to overall high pump prices. its normal rack point. Peace River has among the highest freight cost in the study group. Influence of other markets: Since it is not located on a major inter-urban thoroughfare.000 6. Geographic / Supply / Freight cost considerations: At 1.715 6 8 11. experiencing relatively high gross product margin and consequently. and in fact fell into a tight cluster of four other study markets.45 ¢ 1.Peace River.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. other markets.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Price history / Taxation: Peace River is typical of small.

02 ¢ 11. the community of Thompson clearly falls into the category of a small. These factors resulted in relatively strong per-outlet net revenues. Geographic / Supply / Freight cost considerations: At 3. nor is it influenced by. Although ancillary revenues were the smallest of the study group. MJ ERVIN & ASSOCIATES 61 .08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River.000 14. Manitoba population # of brands # of outlets outlets per 10. Other considerations: Like other small markets. and due to its isolated locale in northern Manitoba.02 cents per litre. and in fact fell into a tight cluster of four other study markets. Although outlets in Thompson appear to be as competitive as those of any other study market. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Thompson is faced with the dilemma. resulting in per-outlet petroleum revenues which were quite typical of many markets. a significant portion of which would likely be distributed towards supplier overhead costs. Supply is via tanker truck from Winnipeg. other markets.Thompson. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. high pump prices. Influence of other markets: Since is not located on a major inter-uban thoroughfare. its usual rack point.975 5 6 4. Price history / Taxation: Thompson was typical of small. It also experienced high freight costs. remote market. Thompson is among the highest freight costs in the study group.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. they were comparable to other markets with similar average throughputs. outlet costs were also modest typical of most smaller markets. This however. isolated markets.014. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. thereby creating the potential for narrower margins. experiencing relatively high gross product margin and consequently.520 litres 14. and reduced pump prices. further adding to overall high pump prices.1 ¢ 3. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. this market has little or no influence upon. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.

098. New York. Figure 32: Toronto .extax Toronto Posted Price .06 cents per litre. and first in average throughput per outlet.3 ¢ 3.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. It consequently has a low freight component.478 litres 3.000 2. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. thus there exists a climate of robust competition. least number of outlets per capita. this market was consistently less than the 10-city average.275. similar to that of Montreal. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. Within this region are thousands of retail outlets. This is likely offset by high operating costs. as evidenced by an exceptionally low gross product margin. and a resultant low consolidated net revenue. Influence of other markets: This market is continuously linked with several other major retail markets. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.Toronto population # of brands # of outlets outlets per 10. On an ex-tax basis however. it is likely that outlet ancillary revenues are among the highest in the country. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.36 ¢ 0. In addition.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . this market ranked first in a number of measures: lowest gross product margin. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. it had the second highest brand variety of the study group. stretching from Pickering to Buffalo. and is also relatively close to wholesale supply sources in the US. With an average “blended” gross product margin of only 3.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Consolidated net revenue: Although no study data was available for this market.775 30 546 2.

08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.97 ¢ 0.ex tax Canada Average . Influence of other markets: Although Ottawa is the only major market in the immediate area.29 ¢ 5. several smaller. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. slightly lower that expected. freight costs within this market were quite low.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . some of which have on occasion priced below Ottawa (see Nanton and Calgary).004.Ottawa population # of brands # of outlets outlets per 10.145 19 209 3. exhibiting all of the characteristics of robust competition. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Other considerations: While pump prices in this market were somewhat higher than in Toronto. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. rural markets co-exist in this area.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. Consolidated net revenue: was low. in fact. ancillary revenue was slightly lower than average.948 litres 5. Although petroleum revenues were typical of major markets. Figure 33: Ottawa . and close to the Canadian 10-city average.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. and operating costs were higher than most.000 678.

000 81. partly due to higher freight costs. a consequence of the transport distance from the rack point.73 ¢ 1. This would suggest that a significant market share is being lost across the US border.465. average throughputs were modest.Sault Ste Marie population # of brands # of outlets outlets per 10. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.475 10 24 2. MJ ERVIN & ASSOCIATES 64 . Influence of other markets: This market is close to a US border market.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. a product of relatively strong net petroleum revenues combined with lower than average operating costs. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Sault Ste Marie is a sizable market. somewhat isolated. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.22 ¢ 7. and between 5 to 8 cent per litre in gross product margin.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. Freight costs are therefore high. and accordingly. this Canadian market has some difficulty in remaining both competitive and viable.550 litres 8. yet with some potential for cross-border retail competition. Pump prices in this market were thus typical of any market with similar throughput characteristics.

Sioux Lookout population # of brands # of outlets outlets per 10. one-seventh the average throughput in Toronto. Influence of other markets: This is clearly an isolated market. with little or no influence from other retail gasoline markets. brands. This would suggest that. was much less than expected for a market of this size. and outlet throughputs of any market studied. this market experiences a high degree of price competition. Sioux Lookout is well-removed from any major highway. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.066 litres 14. Freight costs are therefore high.006 litres in 1995. An average outlet in Sioux Lookout pumped only 694. and had the least number of outlets.000 3.310 3 3 9.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. so that virtually all sales volume represents local demand only. This is a major factor in the high cost of gasoline in this market. despite its high prices. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. largely due to higher freight costs. although high.2 ¢ 11.96 ¢ 3. Consolidated net revenue: No data was available for this market. in fact the second highest in the study group. It therefore presents some unique characteristics for the market study. MJ ERVIN & ASSOCIATES 65 . Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin.

and is also relatively close to wholesale supply sources in the US. Figure 34: Montreal .394. pump prices in Montreal have generally been at or below the 10-city average for major markets. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. this market ranks first of the study group in terms of brand variety.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. with resultant low average outlet throughputs. pump prices in this market have a tendency to be volatile. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . an additional tax of 1. combined with low petroleum revenues and high operating costs.000 1. With 32 competing brands.43 ¢ 0. thus promoting a competitive climate. Montreal was included in the selected market study.extax Montreal Posted Price . Price history / Taxation: As the figure shows. This. On an ex-tax basis however. placed Montreal lowest of all study markets in terms of consolidated net revenue. It therefore represents a highly competitive rack market.5 cents per litre was introduced into the Montreal area).144 litres 5. a function of a competitive rack market and an excess of retail outlets competing for market share. Influence of other markets: Like Toronto.775. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.870 32 866 4.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market interacts with several other markets in the region.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.3 ¢ 5.Montreal population # of brands # of outlets outlets per 10. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.

MJ ERVIN & ASSOCIATES 67 . but is quite isolated from any other markets.28 ¢ 1. although low.08 ¢ 11.250. Chicoutimi is normally supplied from the Quebec city rack. yet is geographically quite isolated. Gross product margin was accordingly high. Nevertheless.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Consolidated net revenue: was average among the study group.605 14 97 8. a partial factor in the high cost of gasoline in this market. by tank truck. but as the figure shows. Freight costs are therefore somewhat high. this market has little potential as a rack market.Chicoutimi population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): Outlet throughputs. both pump and ex-tax prices in this market were higher than average.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.289 litres 12. for example). were quite typical of markets with similar populations. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.000 120. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.75 cents per litre. within a cluster of other markets with similar attributes. In the case of Chicoutimi. this amounted to a reduction of 5. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.

400 6 13 4. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. a key factor contributing to its 14. MJ ERVIN & ASSOCIATES 68 . Gaspé is well-removed from any major highway. located at a considerable distance from its rack source of supply. Influence of other markets: This is clearly an isolated market.17 gross product margin the highest of the study group. so that virtually all sales volume represents local demand only. a product of high freight costs and gross product margins. Nevertheless. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. with little or no influence from other retail gasoline markets. Although operating costs are likely to be low in a small market like Gaspé. amounting to a reduction of 5.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981.50 ¢ 3. in fact the highest in the study group. This is a major factor in the high cost of gasoline in this market. Nevertheless.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. in the case.900 litres 17. ancillary revenues would likely be modest. Consolidated net revenue: No data was available for this market. this margin was only slightly higher than expected for a market with these throughput attributes.Gaspé population # of brands # of outlets outlets per 10.000 16. by tank truck.33 ¢ 14. both pump and extax prices in this market were higher than average. Freight costs are therefore high. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.75 cents per litre.

retail pump prices are ultimately a reflection of rack prices.000 74. the Saint John retail market is relatively isolated from other retail markets of any significance. freight costs in this market are low. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. this market fell within the expected range of gross product margins as a function of outlet throughput.694 litres 9. and is capable of shipping and receiving wholesale product through marine facilities. posted pump prices in the Saint John market have closely followed the 10-city average.970 9 56 7. Average gross product margin was consequently high. Consolidated net revenue: was average for the study group. Nevertheless. Saint John presents some unique characteristics for the market study. which for Saint John. Price history / Taxation: Historically. Since provincial taxes are among the lowest in the country. it is an established rack point.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. That a major refinery resides in this market might suggest that these prices should be among the least in the country.27 ¢ 9. resulting in lower than expected average outlet throughputs. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.extax MJ ERVIN & ASSOCIATES 69 . do not differ markedly from any other rack point in the study group.79 ¢ 0.Saint John NB population # of brands # of outlets outlets per 10.ex tax Canada Average . and therefore.095. Accordingly. ex-tax prices were relatively high. reflected in the high ex-tax pump price. Figure 35: Saint John NB . Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . In fact. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. with or without a local refinery.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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............................................. residuals for outlets not studied may be better.................. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences............................. 50 Finding 20: For the 481 individual outlets studied.... which ensures a competitive product price for buyer and seller alike........................................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.......................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products............................ 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes............... ................... are principally a reflection of changes in the underlying price of crude oil................... when compared on an ex-tax basis................................. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness..... ...... 33 Finding 13: From 1991 to 1996..................................... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations...... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements........ 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.............................................. while those with high Gross Product Margins tend to have low outlet throughputs....... the residual represented a net loss to the supplier....... .. remote population centres.............. In effect. 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs......................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre....................... ................... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads...... these ancillary operations contributed to a lower product margin and consequently.......... a feature of most market-regulated commerce............... particularly in comparisons of major urban markets to small... 71 MJ ERVIN & ASSOCIATES 73 .... .............................. reduced pump prices............51 Finding 21: Based on published rack prices and the individual outlet data... which in turn................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied....... the profitability of the 481 outlets studied appears only marginal......... given the possibility of discounts from posted rack prices and potentially lower overhead costs. .......... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre..... 48 Finding 19: Based on published rack prices...... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences............ and likely a negative impact on consumers............................

and promotions are the other three).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. was shown to be strongly competitive: • A long-term decline in pump prices. This has not simply been a result of a decline in underlying raw materials costs. is mistaken. The Canadian retail petroleum products industry. Rack and pump prices are determined in competitive marketplaces. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. exhibited a diminishing trend (Finding 13). The resultant margins. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. when taxes were excluded (Finding 14). Canadian prices have been at or below US prices in recent years. In comparing several diverse markets. As described in this study however. On a national level. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. place. was observed (Finding 10). Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. over the long term. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. each with unique dynamics. in comparing Canada average (city) pump prices to those of the United States. when measured in constant and nominal dollars. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). by all objective measures available to this study. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). Virtually all of the competitiveness indicators examined in this study relate to price. The study presents such a model. 2. the very margins within which this industry operates has. price is but one of four competitiveness “tools” available to marketers (product. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Although an objective measure of competitiveness is elusive. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. 1.

rack price and freight cost. well over half of all outlets in Canada operate as lessees or independents. presents a competitive disadvantage to Canadian marketers. and do. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. This would entail the tracking of not only pump price. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. and in some markets. This implies that the competitive dynamics pertaining to these retail markets can. it is important to understand that. but also rack prices and outlet performance. Dealers were shown to have a variety of relationships with their supplier. demand and other competitive factors existing at the time. Taxation is a significant factor in the price of retail gasoline. when the “outside” factors (tax. While some markets. MJ ERVIN & ASSOCIATES 75 . generally do not serve as competitiveness inhibitors. an exercise that consumers are unlikely to engage in. municipal levels of government. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4).even negative values.5 cents. retail petroleum markets are considered local (municipal) in scope. Petroleum product taxes are levied at the federal. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. particularly smaller ones. and in some markets. these markets have managed to sustain a certain level of viability and competitiveness. The latter two can vary considerably from one market to another. Due to the localized nature of competition in the retail gasoline marketing sector. or 6 percent (Finding 6) of the 1996 average regular pump price. and accordingly. and are a predominant cause of inter-regional pump price differences (Finding 16). vary considerably from one population centre to another. but given its magnitude. but even in such cases. The demonstrated exception to this is in markets directly adjacent to nearby US markets. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). 3. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. taxation as an element of public policy is an area worthy of additional research. provincial. taxation differences between Canadian and US markets. In applying such a model to the retail petroleum marketing industry. are thus a reflection of the state of product supply. measured against the average outlet throughput for that market. since this is the effective range of consumer choice.3 cents or 9 percent (Finding 5). or even between Canadian markets with differing tax structures. refiner margins accounted for 5. By contrast. for example) were rationalized. experienced higher than average pump prices. and product margins accounted for 3. crude costs accounted for roughly 34 percent (Finding 2).

second only to the United States. constitute a small portion of the retail pump price. which in turn is the principal driver of ex-tax pump prices. MJ ERVIN & ASSOCIATES 76 . it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. The pump price/margin model shows that in 1996. incorporated with ancillary revenues and outlet costs. in a highly distinct. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. exhibited competitive traits typical of any of the study markets. Demand for gasoline was shown to vary significantly according to the time of year. In fact. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. reflecting consumer demand behavior (Finding 15). dealer income. Retail pump prices showed a corresponding seasonal pattern. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. the Canadian retail marketing sector realized an average gross margin of 3. 5. fluctuating prices are a strong competitiveness indicator (Finding 7). and a loss in the case of urban markets. on a per litre basis. and more price-stable markets such as Sioux Lookout. 4. predictable seasonal pattern. a price-stable market. While price wars are undoubtedly an indicator of competitiveness. when distributed these three ways (Finding 20). further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). This margin represents gross revenue (after wholesale product and freight cost) which. on the basis of price fluctuation alone. which in turn. the absence of price war activity does not imply a lack of competitiveness. which represent the majority of Canada’s population base. This consolidated outlet revenue. Pump price fluctuations can be an indicator of competition in the marketplace. Sioux Lookout. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). Retail gasoline marketing revenues.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. Viewed from this perspective. when examined on the margin-volume model. Rack prices were shown to not significantly differ between major centres. supplier costs and profitability. showed a close relationship to underlying crude prices (Finding 11). Retail pump price changes showed a close relationship to underlying rack prices. is available to provide for all retail marketing operations including outlet costs.

Thus. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. and the marketing sector in particular. This trend has both resulted in. not excessive profits. most outlets used in the 19-market study represent major integrated oil companies. this industry sector would have realized profits of unprecedented proportions. Indeed. Thus. and has been a result of. While these economics might appear to place this industry in a position of poor viability. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. despite increases in tax content and crude costs (Finding 12). based upon an assumed posted rack price. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. Nevertheless. several competitive strategies. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. but to increases in underlying rack prices. have caused. Also. Industry profitability is extremely sensitive to very small changes in pump price. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. crude costs. Also. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). and in turn. and have resulted from. in the long term these fluctuations are likely more reflective of market restorations. MJ ERVIN & ASSOCIATES 77 . 7. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Both the downward trend in margins. including: • • • improving production efficiency through refinery plant rationalizations (closures). Declining refiner and marketing margins. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. assuming all other costs were unchanged. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Since 1991. not price. intense competitive pressures in the downstream industry in general. these findings clearly show that pump price increases are ultimately linked not to increased profits. if Canadian average pump prices were only one cent higher than they were in 1995. both of which are beyond the direct influence of Canada’s oil companies.6. and the associated industry initiatives which are ongoing in nature. despite the predisposition of many observers to use them as such. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre.

other factors exist which contribute to relatively high margins and prices. • • At first glance. regardless of size. and this study showed that gasoline prices were no exception. which could actually inhibit competition. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). That such a relationship should exist was not surprising.8. Smaller. virtually all of the 19 study markets exhibited similar levels of competition. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. The costs of most consumer goods in smaller. isolated markets face particular challenges: although found to be highly competitive. most markets. it would seem that if local government in smaller markets were interested in lowering pump prices. poor outlet throughputs were generally the predominant factor. the solution would be to encourage some dealers to exit the market. In suggesting this approach however. When these margins were compared to their corresponding outlet throughputs. Outlet throughput is a key determinant of inter-market pump price differences. A wide range of petroleum gross product margins were evident within the 19market study group. 9. more isolated markets are generally higher than in larger centres. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. Although some smaller markets appeared to have higher gross product margins than larger markets. there are three points to consider: • In very small markets. average pump prices were relatively high. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). MJ ERVIN & ASSOCIATES 78 . thereby improving petroleum volumes and ancillary revenues at the remaining sites. had petroleum margins which were commensurate with average outlet throughput for that market. This created some economic pressure to sell product at a higher pump price. although this study provides comprehensive evidence of this.5 million fewer litres of gasoline than a group A (major centre) station. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. which should. Thus. according to the margin-volume model. reduce pump prices. While competitiveness in most smaller markets was shown to be as active as in larger centres. When plotted against the margin-volume model. reducing the number of outlets may also reduce the number of competitors.

as marketers find even more innovative ways to attract market share. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. the Halifax market. Retail ancillary operations are a critical element of petroleum price competition. The historical record is clear however: since deregulating pump prices. and likely others in Nova Scotia. 11. and as such. The federal Competition Bureau for example. in order to build upon the findings in this study towards a full understanding of the dynamics at work. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The loss of employment represented by a station closure may be of some concern to smaller communities. Convenience store. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. This competition then. Also. has seen a decline in pump prices relative to other Canadian markets. are an acceptable limitation on pure competition (Finding 8). the degree of price competition in the retail petroleum has in effect. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). does not appear to benefit in consumer terms. MJ ERVIN & ASSOCIATES 79 . is viewed as an agency which exists to the benefit of industry and consumer alike. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. Charlottetown. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). and in turn. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. many national and local environmental regulations exist for good cause. and the traditional automotive service bay. depressed petroleum revenues below that of outlet operating costs. is both the cause and consequence of increased activity in ancillary operations. under the current PEI regulatory structure. will likely preserve a highly competitive petroleum market. 10.• A full-serve retail gasoline outlet typically employs 3-5 staff. car wash. As these findings show. is well beyond the scope of this study. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. and the perceived effect on their markets. characterized by narrow product margins and relatively flat pump prices.

would ultimately be reflected in carefully-considered public policy which serves to truly enhance. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. as it does in the Canadian petroleum marketing sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Develop cooperative industry research into marketing sector competitiveness issues. and the nature of competitiveness influences. possibly to the detriment of the consumer. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. not inhibit. petroleum marketing competitiveness. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Improve public understanding and awareness of competition in the petroleum marketing sector. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. 1. and the converse image held in much of the public domain. This should be in the form of a quarterly summary of price trends and related measurements. A regular comprehensive competitiveness evaluation. 2.This study proposes rather. that where a healthy competitive climate exists. in a simple format designed for consumers and legislators. Public perception measurement. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. direct regulatory interventions may have an adverse effect on competitiveness. margins and competitiveness factors.

MJ ERVIN & ASSOCIATES 81 . and regulators alike. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and issues/opportunities facing such markets. along the lines of the model used in this study. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. using Canadian and foreign selected markets. by industry. using Canadian and foreign selected markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and in particular. consumers. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

Appendices MJ ERVIN & ASSOCIATES 82 .

etc. Usually expressed on a per-unit basis.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. Integrated Oil Company . etc. car wash.a generic term referring to a retail outlet operator. for example. currently established at 10¢ per litre. and in some regions.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. The ex-tax pump price is exclusive of these taxes. and therefore purchases its supply of petroleum product from an outside source.the retail price of gasoline that would be displayed if all product taxes were removed. such as convenience goods. and included in the retail pump price. generally expressed in cents per litre.. such as a major oil company or regional refiner/marketer.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Grade Differential .(for the purpose of this study) the cost.a petroleum marketer who is not involved in the refining of petroleum products.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. such as a retail gasoline outlet. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. of transporting petroleum product from the rack point to the final point of sale. These product taxes include Excise tax. CPPI . service bays. GST. diesel. Margin . Distribution Costs .an organization who sells refined petroleum products to end-use consumers. Ex-tax Pump Price . and commission dealers. safety and business issues. but inclusive of any corporate taxes on earnings. municipal tax levees. Dealer . independent dealers. Lessee . which serves as the voice of the petroleum products industry in Canada on environment. Independent Petroleum Marketer .. Downstream . Excise Tax .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. health. in cents per litre. Major Oil Company . the regular unleaded pump price. There are several modes (see below) of dealer operation.I Glossary of Terms Ancillary service .the difference in pump price between a premium or mid-grade of gasoline vs. Marketer . provincial pump tax. lubricants. such as lessees.Canadian Petroleum Products Institute. MJ ERVIN & ASSOCIATES 83 .a service provided in addition to the basic retail petroleum sales operation. an association of petroleum refiners and marketers.

or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices.an organization who. PCF . Rack Point . manufactures (from crude oil) a range of petroleum products suitable for consumer use. these can be broadly classified as company operated.the point at which title to refined product is transferred from the refiner to the supplier. it is usually based on the market-driven rack price.the type of contractual relationship between the supplier and the dealer (outlet operator). MJ ERVIN & ASSOCIATES 84 .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. commission dealer. lessee.the wholesale price posted at the rack point. Throughput . Supplier . Upstream . usually per month or per year. Refiner .the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.Petroleum Communication Foundation. Although in theory the transfer price could be set at any arbitrary value. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. the supplier has initial title to the petroleum product as it leaves the rack point.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Rack Price . In the retail gasoline sector.Mode . an association of upstream and downstream oil companies and related organizations.the segment of the oil industry involved in the exploration and/or production of crude oil. and independent dealer. the raw material from which petroleum products are manufactured. Regional Refiner/Marketer .within the context of retail gasoline marketing. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. This may be at a refinery loading terminal. Transfer Price .

1986 Constant (¢/litre) (3) RUL Ex-tax Price.7 95.7 54.3 96.0 93.1 151.6 51.5 124.1 97.9 26.7 124.8 95.4 34.0 1991 126.1 167.0 111.1 115.9 122.3 115.6 107.4 152.5 30.8 1987 104.8 130.7 22.2 20.9 1993 130.9 108.9 1994 130.5 111.0 102.1 120.8 132.1 144.9 97.0 30.2 45.9 155.4 134.8 106.4 104.1 146.2 127.7 118.1 126.2 45.3 125.7 123.4 124. Nominal (¢/litre) (2) RUL Annual Price.2 50.3 119.1 117.9 118.3 122. No.1 1990 119.1 103.4 97.2 121.0 97.5 25.4 29.0 135.1 104.9 26.9 1995 133.3 151.7 29.1 40.5 126.3 27.4 122.5 112.1 48.2 109. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.5 120.1 120.7 122.0 93.6 122.4 27.4 104.4 120.3 40.1 105.4 57. using a weighted (by provincial gasoline demand) 10 city average.4 110.3 132.0 19.8 108. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.8 94. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.2 142. Nominal (¢/litre) (2) RUL Ex-tax Price.8 93.6 136.3 52.2 99.1 117.6 91.3 139.3 134.0 1988 108.4 136.5 100.3 160.3 19.5 145.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 115.3 55.3 58.1 87.2 30.3 1989 114.8 47. 62-010: Consumer Prices and Price Indexes.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.0 104.2 49.2 92.9 115.3 141.4 45.4 53.6 92.2 39.5 94.5 49.7 96.1 104.8 135.7 132.2 112.7 30.1 26.0 32.8 28.8 104. MJ ERVIN & ASSOCIATES 85 .2 133.2 31.0 115.0 42.6 133.3 1992 128.

7 7.2 16.6 26.0 24.7 7.4 14.2 6.7 4.7 31.0 25.4 21.3 6.6 13.8 21.4 55.6 52.3 56.2 8.3 13.0 55.9 25.7 29.8 55.7 13.2 21.0 26.4 12.1 17.5 31.2 5.2 27.4 26.2 63.2 23.9 6.9 23.1 23.2 7.0 20.9 22.1 21.3 54.6 7.9 25.0 24.5 6.0 14.6 28.2 11.9 26.8 28.5 27.0 52.4 14.5 26.1 39.4 33.5 56.4 22.7 14.5 15.4 8.6 26.3 26.1 22.6 6.4 20.8 55.9 4.5 57.0 16.3 13.9 53.7 19.8 26.Table B: Key Price / Margin History .9 55.4 24.6 18.2 56.8 21.5 35.5 11.7 34.6 8.7 24.9 9.9 30.2 14.0 15.2 16.6 54.1 53.8 57.6 54.1 52.8 16.0 24.1 5.1 13.4 MJ ERVIN & ASSOCIATES 86 .4 58.7 18.6 26.8 33.7 32.3 54.3 23.2 22.4 7.0 7.9 14.2 65.1 23.4 31.9 7.7 19.0 24.5 33.6 25.6 5.8 53.1 16.9 7.2 13.9 26.3 58.3 4.5 23.3 66.4 15.7 14.8 25.7 6.0 8.0 16.7 63.6 21.2 27.7 18.4 29.9 11.0 9.7 12.6 23.1 53.8 15.1 18.0 24.3 12.3 13.2 6.8 24.8 23.2 23.5 5.1 9.7 14.7 28.8 8.9 53.3 13.5 Gross Marketing Margin Gross Refiner Margin 53.4 13.1 7.9 6.2 24.8 29.9 6.9 25.8 14.4 32.3 13.2 7.5 16.5 7.7 33.0 33.2 27.5 19.0 26.5 7.2 14.2 29.3 56.5 30.8 30.0 16.7 29.5 23.2 25.2 13.4 31.8 9.6 20.5 28.5 10.1 25.3 57.8 53.1 16.6 54.8 23.1 18.6 24.4 13.7 4.5 32.0 5.5 26.0 4.9 56.9 25.2 7.2 4.8 8.3 14.0 7.0 26.9 25.2 41.0 25.9 8.7 14.9 15.9 31.1 13.0 10.3 9.3 22.2 26.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.4 56.5 14.8 22.9 58.1 16.0 24.5 27.7 4.3 17.0 54.7 Downstream Margin 14.2 15.1 22.0 28.7 25.6 4.7 39.3 Tax Content 23.2 13.2 25.9 24.3 22.2 12.4 14.2 7.9 7.0 16.1 23.8 14.7 14.5 23.9 23.9 14.6 9.0 22.4 57.7 7.7 15.3 25.1 29.9 4.1 19.0 12.3 6.1 16.4 26.4 9.2 26.9 17.5 22.4 24.6 25.5 8.4 26.3 15.0 13.8 11.3 24.8 14.3 5.8 26.0 24.4 14.7 23.4 53.1 13.0 7.4 34.9 55.9 23.7 8.5 10.7 58.9 54.9 56.9 13.6 13.5 14.9 12.8 14.5 25.3 15.3 26.3 54.2 13.9 21.6 23.5 54.4 30.3 42.8 13.7 29.1 24.1 7.

7 3.0 5.3 7.0 28.9 4.3 26.5 6.0 14.7 6.4 11.3 26.1 14.3 26.0 12.7 53.8 49.7 24.6 17.8 23.8 25.6 12.5 20.8 6.1 6.5 15.5 21.3 53.9 29.9 5.7 53.4 6.9 28.7 53.0 6.4 26.6 16.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.1 15.0 25.5 6.7 25.0 5.9 29.3 9.8 29.3 28.4 7.7 15.0 6.0 26.2 12.9 58.2 9.3 55.4 16.2 26.4 13.6 11.2 49.5 23.3 27.5 21.2 7.1 16.1 26.9 19.4 5.9 11.3 26.3 23.5 5.1 3.1 Gross Refiner Margin 7.1 54.4 15.2 25.5 7.4 21.3 58.7 16.4 26.9 27.7 14.5 5.2 5.0 54.1 20.6 10.3 9.2 14.7 24.5 7.1 11.9 12.4 4.3 26.7 5.7 8.4 6.2 Gross Marketing Margin 4.0 29.5 53.7 52.9 49.8 52.6 4.6 27.1 61.2 14.1 Tax Content 26.2 15.9 9.4 26.5 2.5 6.9 12.5 14.1 11.0 11.1 11.0 24.5 17.3 12.0 25.4 32.0 28.3 4.6 4.1 51.3 4.8 28.3 26.2 28.1 57.1 14.9 23.9 4.4 28.2 11.0 6.0 57.7 7.4 6.1 26.7 25.5 28.5 19.6 9.0 28.9 49.3 9.2 54.2 7.9 3.2 20.5 19.5 25.0 53.8 22.0 9.4 25.0 27.5 54.3 25.4 25.1 6.2 4.5 13.9 26.6 20.6 15.0 28.8 10.7 13.9 Downstream Margin 12.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .6 3.5 13.6 21.6 53.3 7.7 18.5 21.1 15.1 14.4 6.5 3.1 10.5 11.7 14.3 8.2 25.7 29.8 23.9 14.7 12.3 26.3 28.9 14.7 6.2 4.2 26.9 6.0 14.1 11.3 26.2 23.6 20.3 26.2 27.1 21.6 10.0 9.8 50.2 14.6 15.3 13.3 54.2 26.1 6.4 51.8 28.9 27.4 26.6 23.5 4.7 26.7 23.5 55.3 6.7 51.3 4.7 13.7 3.0 12.1 15.6 53.9 17.5 3.6 19.0 26.8 4.1 6.2 7.1 55.7 26.8 17.1 24.5 9.1 26.3 21.5 11.0 28.2 20.1 51.0 52.4 21.4 24.6 5.8 27.8 20.2 7.3 21.7 5.7 7.

047 2.4 32.027 2.739.604 2.263.801.457 2.979 3.131.2 27.564 2.890.2 27.6 21.773.477.3 23.130 3.661 Canada Avg ex tax RUL pump price (¢/l) 39.7 24.897 3.114 3.804 3.960.056 3.047 3.164.2 20.2 27.627 2.5 30.684 2.301 2.095 2.181.182 3.968 3.8 23.633 2.7 24.808.934.370 2.389.321.682.853 3.935 3.9 19.199 2.775.051 3.510 3.415 2.443 2.932 2.412 2.532.029 2.887.429 2.8 28.619 2.5 27.141.369.2 26.456 2.894.802 2.970 3.0 20.427.767.779 2.354.245.0 28.976.2 26.716.030.191 2.572 2.301.458.325 2.9 21.299 2.316.566.097 2.703 2.101.622.462.732.133 3.122.1 16. Inventory.437.580 3.000 3.3 23.693 3.7 29.6 26.122 2.019.035 2.270 3.202 3.176 3.283.714.201.044 2.3 22.637 3.112 2.661 Canadian Domestic Gasoline Sales (M3) 2.295.422.188 3.070 3. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.930 3.083.439.1 23.8 22.748.345.202.8 21.003.160 3.381 2.970.876.688.501.2 24.218.967 2.2 23.4 31.475 2.025.089.322 2.168 2.2 21.287.9 23.015 3.9 26.677 3.498.429 2.647.5 31.798.409.864 2.9 17.998.037 2.687.822.108.931 3.636.141 3.291.5 23.020 2.973.324 2.666.335 2.941 2.281 2.810.827 3.140.612 3.379.120.490 3.179 3.709 2.8 33.331 2.729.725.026 2.558.161.771 3.900.938.952.326.142.299.869 2.4 24.151.565.752 2.599 2.377.516.193 3.366 2.7 28.893.630.621.2 29.369 2.840.897.485 2.268 2.2 23.853.735.958.9 31.6 28.609.346.085.682 3.262.338 3.322 3.220.709 2.269 2.600.4 22.509 3.818.625 2.437.636.3 24.450 2.873.6 24.232 3.613 3.3 22.039.235 3.255 3.130 3.113.461 3.081.218 3.469 4.430.642.132.095.831.933 3.743 2.251.843.250.9 23.644 3.620 3.067.193 3.4 21.4 25.246 2.970.180 3.311 3.518.671.5 25.479 2.748 2.969 2.7 29.4 21.176 2.045.744.651 2.830.011 2.2 27.641.403 2.966.841 2.9 23.884 2.7 34.5 28.152 2.1 23.615 2.301.781.979 2.839 2.544 3.589 3.628 3.9 26.5 27.329 3.499 2.Table C: Canadian Supply.6 23.256 2.285 2.297 2.871 2.7 26.075.473.878 2.1 21.3 26.801.904.592 2.767.254 2.7 21.853 2.300.4 24.646 2.361.254.654.587.799.2 22.476.209.672.287 2.315 2.7 18.897 2.180.1 22.521 2.930.180 2.1 23.508.7 31.333.3 Canada Avg RUL Rack Price (¢/l) 35.883.323 3.279 2.141.804 2.411.633.626.286.254.886 3.9 29.8 26.070.8 27.720 3.002.558.995.813 2.242 2.859 2.192.073 2.281.102.733 2.416 2.101 2.844.865.837.0 24.710.8 23.022.673 2.313 2.8 30.8 29.874 3.5 22.880 Canadian Retail Gasoline Sales (M3) 2.889 3.833 2.9 30.7 29.667 2.765 3.045 2.8 MJ ERVIN & ASSOCIATES 88 .206.441.322 2.5 19.823.373. Demand.502 2.045 2.669.796.287 2.782 3.298 2.5 32.378.294.4 29.9 22.455.1 29.480.785.

965.344 3.2 25.9 29.0 25.649.324 2.074.796.1 24.4 26. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .112 3.386 3.005 2. demand.593.0 26.442 2.649.7 22.8 24.182.8 25.606.566 3.8 28.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.055 2.617 2.714 2.656 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.7 Canada Avg RUL Rack Price (¢/l) 20.426.830 3.2 25.7 21.717.250.889.555.198.264 2.382.082.871 3.184.928 3.315.5 25.5 21.1 21.7 19.970.516 3.165.123.130 3.864 2.999 3.4 20.048.703 3.8 20.521 2.097.386 3.8 21.785.994 3.222 2.9 22.149.799 2.961.539.320 3.0 25.068.692.537.977.519.338 2.806.037 3.370.986.825.601 3.204.904.6 20.363.179.797.644 3.881.906.467 2.614.669 2.2 26.077.141 2.205 2.648 3.658.9 27.376.155 2.198.148.346 2.390.857.006 3.483.324.0 24.214 2.607.4 26.997 2.936 3.773.336.5 source: Statistics Canada (production.930.984 3.264 2.679.675 2.505 2.195.0 26.5 21.671.863.597 2.469.940 2.170 Canadian Retail Gasoline Sales (M3) 2.6 20.480 2.414 3.638 2.840 2.244 3.919 2.198 2.660 3.415 2.620.753 3.170 3.667 Canadian Domestic Gasoline Sales (M3) 3.791 3.261.294 3.317 2.4 25.

5 56.9 62.2 46.5 47.9 53.3 49.1 44.9 57.0 59.3 42.3 52.2 62.4 59.9 52.9 59.9 55.6 58.3 61.0 50.6 46.5 53.7 54.0 46.6 52.9 44.2 46.9 56.5 57.2 62.4 Winnipeg 49.5 58.8 54.9 53.6 53.8 47.9 47.9 64.8 53.9 51.2 43.8 48.5 55.7 44.7 White Rock Calgary 45.9 53.9 62.9 61.8 52.8 52.9 56.7 51.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.8 53.5 52.0 52.4 53.7 46.4 58.5 56.8 53.2 65.5 54.2 47.9 52.8 56.8 48.0 61.5 60.8 59.2 59.9 56.9 55.5 53.8 Thompson 59.1 52.4 52.9 61.4 49.5 59.9 64.6 47.0 57.9 54.9 56.9 52.6 58.2 62.9 58.9 52.0 61.2 61.9 61.9 56.2 54.2 51.4 52.7 51.4 56.1 55.7 52.5 58.8 64.4 54.0 39.2 51.0 61.9 56.6 51.8 52.3 51.9 56.8 56.9 50.6 54.4 52.4 63.7 45.4 48.2 54.3 48.7 53.4 55.5 59.5 59.9 47.7 62.8 57.6 48.9 64.7 65.8 48.7 65.8 49.7 53.2 54.2 62.0 55.4 55.5 51.4 46.7 57.4 50.0 61.3 59.3 52.5 60.3 50.9 61.9 49.8 56.0 61.2 50.5 59.9 54.5 57.5 58.3 54.5 57.1 49.9 64.2 50.5 59.3 56.9 53.Table D: Pump Price History .0 61.5 57.1 50.6 48.0 48.4 61.0 62.9 52.0 44.6 62.0 Sioux Lookout 62.7 54.7 65.5 54.0 52.7 57.5 58.3 62.5 59.9 47.5 60.9 53.5 58.5 47.7 53.1 43.2 62.9 45.5 59.5 56.8 44.9 53.5 58.2 55.5 Vancouver 53.6 47.7 52.2 62.9 63.2 57.7 50.9 58.9 53.9 49.6 50.4 65.4 55.5 58.6 54.5 59.8 56.6 50.5 57.1 53.5 55.1 60.9 MJ ERVIN & ASSOCIATES 90 .3 52.7 50.8 51.5 57.4 54.4 56.1 49.7 54.5 61.5 59.8 56.5 60.3 52.9 53.8 52.9 52.9 57.5 51.9 53.8 50.2 48.1 56.3 48.6 55.9 54.1 52.9 55.7 48.5 46.8 50.4 52.6 49.1 49.6 47.3 49.9 56.4 53.9 52.5 57.5 60.9 64.9 51.5 58.3 54.4 56.2 62.5 62.7 62.4 52.1 50.6 55.5 58.1 55.2 50.4 56.9 48.5 49.7 45.4 57.4 57.4 55.9 47.9 54.4 61.0 61.8 41.8 52.9 54.3 55.9 53.2 46.0 58.8 59.5 57.5 45.5 60.6 46.5 47.2 58.1 55.7 49.2 51.4 55.9 61.6 59.0 59.0 54.8 48.9 55.7 48.4 54.5 57.8 56.5 45.5 50.9 58.5 61.3 55.5 51.3 50.5 57.1 59.9 54.5 58.0 62.9 51.9 56.8 53.4 56.9 53.2 Nanton Peace River Regina 49.5 56.7 63.2 63.9 44.7 51.5 56.6 48.9 54.5 57.5 57.9 56.5 52.8 45.4 61.5 51.2 62.2 56.5 58.5 57.5 51.8 55.8 47.9 49.9 46.1 53.7 65.6 53.9 58.4 56.8 57.7 65.3 52.1 44.9 56.6 44.9 61.5 58.9 54.6 56.0 62.4 58.9 58.4 47.4 46.4 55.2 65.2 62.9 51.5 53.9 59.1 41.4 53.4 46.

0 60.5 53.9 51.5 56.2 55.1 51.6 55.5 52.6 51.1 54.2 52.6 53.8 56.3 54.9 64.0 52.0 47.7 50.6 52.9 49.0 53.5 51.9 49.9 49.2 57.3 56.8 55.0 57.0 54.2 57.7 51.8 55.3 54.2 57.3 52.4 54.2 59.8 59.6 50.7 57.2 56.9 55.3 55.1 53.2 57.7 57.5 59.9 53.5 Ottawa 58.8 49.7 46.9 56.3 54.6 60.3 59.1 54.6 54.4 52.5 56.1 55.3 61.8 63.0 56.5 54.4 58.1 61.5 54.0 52.5 60.1 59.0 47.4 57.4 54.0 49.3 55.1 60.0 52.6 58.9 61.4 53.5 61.5 64.1 58.1 55.2 55.6 54.6 52.7 55.7 52.5 55.5 54.1 58.7 56.8 50.8 55.9 54.3 59.1 58.6 55.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.7 60.7 58.1 57.1 61.9 55.7 54.3 57.1 60.6 58.2 49.1 51.9 57.6 59.1 56.0 55.6 50.3 59.2 Chicoutimi Gaspé Saint John 60.8 55.5 58.2 58.5 51.2 59.9 60.9 56.4 57.0 52.5 61.6 54.7 44.8 47.2 61.8 61.2 54.5 56.1 55.4 52.1 53.7 54.0 61.2 56.3 56.1 53.1 54.2 56.5 59.2 51.7 64.3 56.2 54.0 53.2 60.2 49.8 53.1 52.7 56.1 51.7 56.5 54.6 52.7 57.4 57.3 55.9 55.3 53.8 Halifax Charlottetown 60.6 61.2 60.9 60.1 52.3 55.1 56.0 60.2 49.9 53.6 51.1 52.4 57.4 54.8 51.6 63.2 56.9 61.1 59.0 50.6 54.1 56.9 55.5 60.7 54.5 55.9 55.3 49.6 56.8 55.7 59.3 54.5 61.5 63.7 58.7 56.6 56.4 51.1 53.7 51.2 55.5 57.6 54.6 55.8 60.5 67.1 57.2 57.8 61.4 55.8 57.4 53.0 55.7 52.7 54.4 58.6 53.2 61.5 53.9 56.6 56.3 55.4 54.5 51.5 54.6 63.6 49.4 49.8 52.1 54.8 52.4 58.0 48.7 56.0 54.8 56.4 60.2 53.6 50.5 56.2 51.9 52.0 56.8 60.9 53.5 64.1 55.1 Toronto 52.4 50.3 52.3 49.0 61.4 57.2 54.5 48.6 54.4 58.8 54.2 53.9 54.7 49.7 57.2 51.0 55.2 56.2 58.6 52.6 52.6 58.1 53.6 58.7 54.0 52.9 63.6 63.2 Montreal 63.5 MJ ERVIN & ASSOCIATES 91 .6 59.8 50.3 56.8 54.4 54.5 59.7 56.0 60.9 57.0 57.2 57.2 56.2 57.8 53.6 55.8 54.6 55.5 63.2 54.3 54.8 55.2 56.8 55.0 56.4 57.2 50.4 53.2 53.2 57.2 52.9 50.1 49.3 54.3 53.0 55.2 54.0 51.4 45.4 51.4 54.1 48.2 58.9 57.7 53.6 52.6 61.4 58.2 55.2 61.1 55.0 55.6 55.5 57.9 58.8 57.6 51.9 64.9 55.2 57.5 51.9 54.4 53.7 51.6 Canada Avg 55.5 54.1 61.0 59.8 50.8 54.9 62.3 54.9 55.7 48.5 52.5 53.3 54.6 58.0 53.3 58.3 53.5 57.3 52.0 59.5 56.2 52.7 53.5 52.5 63.4 55.9 53.1 54.2 49.5 54.7 59.1 55.0 54.0 54.4 54.8 57.9 61.3 51.3 53.6 57.9 49.9 60.0 57.8 53.6 53.9 55.3 60.4 58.0 51.3 55.0 50.1 54.7 52.7 57.9 64.6 52.6 53.0 48.7 47.8 49.9 61.6 59.5 53.6 54.9 56.9 57.2 56.9 58.1 57.6 49.2 55.3 56.3 53.7 54.7 48.0 57.9 61.9 55.2 55.5 52.1 58.8 55.0 58.4 54.7 51.9 55.5 57.2 57.3 52.0 60.0 59.0 55.Table D: Pump Price History .3 62.5 57.0 50.9 53.6 55.0 52.4 51.5 55.3 54.6 56.3 59.

3 29.3 30.4 27.7 31.8 29.8 26.7 30.9 28.7 28.0 25.9 30.9 27.9 21.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.7 29.5 21.2 27.1 30.5 27.4 24.0 28.3 26.3 30.6 27.3 29.5 27.7 26.1 Apr-95 30.3 Feb-95 26.6 23.7 28.3 21.4 30.9 30.9 21.0 Jun-93 26.7 Sep-95 30.5 23.0 29.6 30.5 29.7 29.9 24.2 26.5 Jul-95 30.0 26.3 27.8 Dec-93 26.5 26.4 20.1 30.4 26.6 25.0 May-92 28.3 30.0 23.0 31.9 24.8 24.7 Aug-92 24.1 20.8 25.4 29.4 21.9 31.2 24.6 25.8 Jan-94 25.4 28.2 Apr-93 28.4 31.4 25.8 25.7 Sep-94 32.2 25.4 29.7 Jan-92 31.6 22.4 22.1 23.9 28.3 26.6 26.4 27.9 Jul-93 28.9 23.2 Dec-94 26.7 Mar-94 28.5 28.2 28.8 27.3 28.6 May-95 29.3 24.9 29.3 28.4 31.8 27.4 Dec-92 31.4 24.3 24.3 24.4 31.3 33.6 23.4 31.2 26.3 28.8 Feb-94 24.3 29.8 27.8 26.1 25.3 29.7 24.7 28.6 28.5 27.2 32.5 Jul-94 29.3 29.3 Dec-95 Edmonton Regina extax extax 27.4 31.2 29.5 21.0 23.4 30.5 Oct-92 30.1 27.5 29.5 25.1 27.6 22.0 27.5 Feb-92 28.0 Oct-93 28.5 29.3 26.8 31.6 28.2 22.9 25.4 28.6 29.0 32.0 May-93 29.5 Nov-95 30.4 23.0 27.1 31.0 23.5 Aug-94 28.6 26.8 24.9 20.9 24.3 26.4 31.3 28.7 28.2 25.6 26.8 Toronto extax 26.8 28.7 26.9 27.2 26.6 Jun-92 32.2 28.8 23.4 22.8 26.5 27.3 28.7 28.6 27.5 26.4 31.7 27.0 24.1 26.8 28.6 Mar-93 28.5 29.5 29.7 30.1 Feb-93 29.9 29.1 31.1 28.4 27.2 Nov-94 29.4 27.4 29.9 29.8 29.6 26.6 21.9 26.2 Nov-93 27.4 28.3 29.7 26.5 23.1 22.8 27.4 25.5 27.4 22.7 29.8 27.6 24.2 28.0 26.9 24.5 24.9 30.9 25.2 23.3 23.5 Sep-92 29.6 27.3 Jan-93 30.0 24.0 23.7 28.4 20.9 28.4 30.9 25.7 26.0 24.1 19.1 25.2 24.1 28.4 29.4 Mar-92 28.9 28.3 May-94 28.8 29.4 29.9 26.6 Sep-93 28.4 29.1 Mar-95 29.1 Apr-94 29.7 30.4 25.2 26.2 Nov-92 31.9 27.9 26.2 27.3 Jul-92 31.6 24.0 23.0 Apr-92 30.3 29.6 23.3 32.9 23.4 23.1 24.2 24.7 Jan-95 27.7 Winnipeg extax 27.2 Jun-94 31.1 24.8 21.0 25.Table E: Ex-tax Pump Price History .1 25.8 28.7 30.3 26.3 29.6 29.8 29.9 26.2 29.8 27.9 24.4 20.6 26.3 29.3 23.6 29.4 30.9 Aug-93 30.6 30.7 25.8 24.4 29.6 26.1 25.4 Jun-95 30.7 27.9 27.0 25.7 29.4 27.0 22.4 23.2 28.8 24.4 25.1 26.6 23.9 Oct-94 32.0 21.3 29.5 24.1 24.4 MJ ERVIN & ASSOCIATES 92 .3 30.7 24.0 31.2 24.9 25.3 27.6 30.9 25.8 25.7 30.5 24.6 26.8 22.6 27.8 26.6 Aug-95 30.1 22.6 26.3 31.0 26.4 25.6 29.5 Oct-95 30.

3 31.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.8 28.1 28.3 28.2 27.7 32.5 31.6 28.2 32.2 28.2 28.4 32.0 32.8 23.2 22.6 23.9 32.4 33.7 MJ ERVIN & ASSOCIATES 93 .9 31.3 34.9 26.1 22.2 30.6 27.3 31.4 26.4 32.3 28.5 34.2 30.2 25.2 32.9 27.5 28.1 25.1 24.8 30.0 29.9 32.9 30.0 25.6 28.7 34.7 Quebec extax 32.4 34.6 28.2 22.7 32.6 34.8 33.7 29.2 30.7 26.0 25.0 31.2 27.7 27.4 33.6 27.7 33.5 25.6 Charlottetown extax 36.6 26.7 28.3 26.1 29.7 28.8 25.0 36.8 26.6 26.8 28.3 28.8 28.7 26.8 25.2 29.9 26.9 27.5 25.0 30.1 30.1 Montreal extax 31.5 27.2 36.7 25.5 32.8 29.0 26.2 25.Table E: Ex-tax Pump Price History .0 28.6 31.2 26.1 31.2 26.3 24.8 27.6 27.3 34.0 34.2 32.9 23.7 26.5 30.8 32.4 31.4 33.7 24.6 26.0 32.5 33.3 34.7 24.1 24.6 33.0 25.7 22.9 35.8 29.5 29.6 32.5 25.0 28.8 30.9 29.1 34.1 23.9 26.2 27.9 27.9 30.4 25.2 21.8 33.2 27.5 24.2 27.4 36.6 32.3 31.2 26.0 29.4 31.4 24.7 28.8 28.7 34.8 24.5 33.9 29.9 32.6 28.0 34.8 23.7 24.4 36.2 24.3 25.3 22.8 Canada Avg extax 29.3 23.6 28.6 22.7 23.8 27.8 32.4 28.5 25.1 32.8 25.7 32.5 36.1 30.4 31.0 33.7 28.9 29.1 24.2 26.6 29.5 31.8 26.5 27.2 34.9 33.1 34.0 30.9 28.7 26.6 25.7 23.4 28.5 28.9 29.8 28.0 33.3 35.6 32.2 27.5 26.3 28.8 32.3 29.0 34.4 26.3 29.2 33.2 25.1 32.9 30.1 32.6 26.4 27.6 32.9 24.7 27.2 27.4 33.0 26.2 27.1 26.5 25.9 29.7 24.0 28.7 30.0 33.0 26.8 23.8 23.4 33.8 26.9 29.4 21.7 27.2 36.7 26.1 28.2 28.9 33.0 33.1 30.9 28.4 26.8 29.5 28.1 24.4 32.6 36.3 27.0 28.5 24.8 25.1 29.9 31.4 25.2 25.5 25.2 Saint John Halifax extax extax 34.9 30.4 25.1 34.4 22.0 29.7 24.8 27.4 24.2 27.3 26.3 27.2 22.3 29.5 30.8 27.0 27.3 29.2 22.6 33.3 28.3 26.5 33.2 33.5 30.9 27.4 25.9 29.1 29.8 32.2 26.7 29.7 30.0 28.5 27.9 37.9 32.3 25.5 28.1 26.8 29.3 25.7 23.0 23.8 29.3 30.6 31.0 33.8 28.8 30.5 26.1 32.6 25.0 23.9 27.7 26.8 26.3 31.5 27.3 29.3 31.6 24.7 27.2 23.6 36.7 28.8 36.8 26.3 25.6 29.6 32.2 24.6 34.0 36.6 23.9 30.3 33.

6 19.7 18.3 21.4 22.4 21.1 20.3 21.4 15.4 24.2 19.1 21.8 21.2 21.4 21.3 17.1 20.3 18.5 21.6 25.9 21.1 20.8 22.7 22.0 21.9 21.7 21.5 21.5 23.8 18.6 20.4 23.0 22.5 22.7 17.3 23.9 18.2 22.4 21.7 19.7 21.4 20.9 23.5 21.4 21.3 21.1 24.0 19.6 19.1 18.5 21.0 21.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.8 18.5 26.0 23.9 20.4 23.5 22.6 25.0 23.1 15.1 16.8 22.4 21.1 22.3 19.4 22.8 25.2 16.4 21.7 20.7 21.9 25.5 21.5 27.2 20.1 20.4 19.4 20.4 21.2 23.4 22.4 22.5 18.0 21.1 19.1 20.6 23.4 22.2 18.6 23.0 23.5 21.0 20.8 21.2 21.2 21.5 21.6 20.8 22.0 19.7 22.2 18.8 23.8 19.4 21.8 23.8 21.2 18.3 22.2 23.8 19.3 26.3 18.3 20.6 18.4 20.9 21.0 21.3 23.5 24.6 19.6 19.2 19.0 19.9 22.4 22.9 21.9 18.4 23.3 20.2 23.7 23.5 17.9 22.2 21.5 22.3 19.8 21.0 23.7 20.7 21.4 20.1 20.8 18.6 20.7 19.1 21.1 19.6 21.2 21.Table F: Rack Prices .3 17.3 19.3 20.7 18.3 22.0 21.1 23.8 23.8 20.1 20.3 17.2 20.7 21.2 21.6 23.5 18.6 23.6 23.1 22.5 19.6 23.2 20.6 22.1 22.1 22.2 23.3 20.2 20.8 20.3 19.9 21.2 21.0 20.6 19.7 17.1 22.8 23.6 19.6 20.8 19.8 22.5 19.6 20.1 22.1 20.3 21.5 20.7 23.4 21.7 16.4 21.7 17.7 22.8 20.7 22.1 19.4 22.5 22.0 22.8 22.3 24.8 24.0 23.4 22.3 23.7 22.8 21.0 21.3 21.9 22.5 20.5 22.1 23.0 23.8 19.1 Halifax rack 20.9 22.7 22.4 22.5 20.7 22.0 22.1 21.0 24.2 21.0 22.1 21.3 22.9 18.5 17.9 23.4 18.6 21.9 17.3 23.8 27.5 20.8 20.3 18.2 Quebec city Montreal rack Toronto rack rack 19.8 23.7 MJ ERVIN & ASSOCIATES 94 .6 20.8 20.2 19.9 19.1 21.3 23.4 21.9 20.5 23.1 21.2 16.2 18.5 24.3 23.9 22.0 23.3 22.8 23.0 22.9 21.4 22.6 20.3 23.4 21.8 20.4 20.2 20.7 22.5 17.9 22.1 21.5 22.8 23.2 20.6 25.2 22.8 21.0 22.2 17.5 24.1 15.7 21.7 21.1 22.2 18.4 17.9 24.5 23.4 23.0 23.7 20.2 16.9 20.2 29.7 22.1 23.2 22.9 22.1 21.4 21.3 24.9 18.0 21.4 22.8 18.5 21.8 Ottawa rack Thunder Bay rack 20.

9 22.0 21.0 22.1 25.8 23.4 21.6 21.5 23.3 23.2 22.3 22.3 17.4 23.4 22.3 24.6 21.2 21.9 21.8 23.1 21.7 22.2 23.6 23.2 22.8 23.6 25.1 20.8 22.1 22.2 20.2 24.4 22.5 21.2 21.0 21.5 22.7 22.2 23.6 21.9 18.1 23.5 21.0 17.5 20.0 23.1 22.3 17.1 23.4 23.1 23.0 23.9 22.5 23.3 23.1 24.0 17.3 20.1 18.2 20.3 22.6 21.2 18.0 22.5 23.6 23.5 21.1 17.8 24.9 22.6 23.0 21.5 24.9 23.5 20.0 22.5 24.2 24.7 22.3 23.9 19.1 25.2 22.6 21.5 21.5 18.0 22.8 20.1 23.8 Vancouver Victoria rack rack 24.0 22.1 21.3 23.2 22.7 21.9 21.4 19.7 21.6 25.6 22.9 17.9 19.6 23.7 22.7 23.8 20.4 19.5 20.7 25.7 21.2 20.0 23.3 18.8 21.8 20.8 22.6 25.4 21.9 18.9 21.0 18.8 20.6 20.7 20.4 22.2 21.7 21.6 24.3 21.9 23.1 21.9 24.5 22.8 21.0 23.8 20.1 23.7 22.0 18.0 20.3 17.5 19.4 24.7 24.3 22.2 24.6 21.5 19.1 20.2 22.1 22.0 24.9 21.9 23.6 22.7 22.0 22.1 21.7 21.6 23.1 23.8 22.5 MJ ERVIN & ASSOCIATES 95 .2 22.3 24.3 20.7 25.4 24.3 20.7 21.7 21.0 21.9 22.3 21.6 22.7 24.2 19.1 18.3 24.1 16.2 23.1 21.8 23.1 23.8 22.4 18.1 22.5 23.7 18.5 24.5 23.0 22.7 21.0 20.4 21.5 18.6 20.2 20.3 19.3 21.Table F: Rack Prices .5 21.6 20.8 18.4 23.8 22.7 17.4 21.9 24.8 21.2 22.8 21.5 21.9 20.8 24.0 25.9 20.8 24.5 23.0 20.9 23.0 24.9 21.1 19.7 23.0 24.1 23.4 24.5 21.9 22.3 23.3 24.3 20.9 23.4 23.9 21.6 23.4 21.3 21.1 21.0 20.1 21.4 20.6 20.1 23.2 22.8 19.2 23.9 19.2 21.6 17.3 23.8 22.5 22.4 21.2 Edmonton Rack 23.6 19.5 22.4 25.2 20.5 21.7 21.4 21.8 25.1 22.1 20.9 20.6 21.0 23.7 22.4 24.5 23.6 17.5 22.5 21.9 22.2 19.6 23.5 20.4 21.7 21.5 19.9 21.3 22.9 21.9 19.7 23.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.7 21.7 23.5 22.9 22.5 19.0 24.2 23.7 22.4 22.4 20.0 22.7 21.1 16.5 Canada avg rack 22.6 23.2 24.7 17.1 21.7 24.9 19.2 24.5 24.5 21.6 19.2 23.1 22.1 25.6 22.7 19.6 21.9 19.9 24.9 21.6 24.9 22.0 21.5 17.3 19.9 23.9 22.6 21.4 22.3 23.2 21.1 23.9 19.7 23.1 19.7 22.7 22.6 21.

460 833.296 179.10 53.30 66.241 451.07 61.10 52.483 63.20 61.196 669.92 51.24 61.40 59.40 54.30 57.87 61.48 56.20 60.000 1.34 63.194.50 56.20 58.332 101.245 351.687 1.543 2.234 799.980 120.513 19.438 591.897 350.50 55.70 49.30 63.26 63.65 54.997 397.972 429.500 378.905 183.370 41.55 58.377 30.971 473.704.45 53.30 54.60 49.922 103.28 65.250 748.850 126.02 51.935 758.749 91.420.712 1.770 2.40 61.36 54.702.11 58.60 50.192 2.204.811 120.23 53.894 1.249.698 Note: Regional.97 51.052 84.268 478.53 48.26 44.686 273.113 2.832 91.749 243.643 184.298 576.018.475 1.23 63.00 57.45 63.174.13 58.895 600.246 2.166 102.80 64.19 49.20 59.16 59.859 240.98 59.22 59.89 61.19 52.300 578.89 65.810.625 64.20 54.90 63.669 203.03 58.83 68.214 248.85 54.597 2.000 1.745.30 68.00 62.985 636.238 2.74 57.483 2.26 49.628 702.621 102.412 722.557.614 3.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.53 61.00 57.66 50.60 60.448.702 333. Urban.220 389.97 63.141.102 98.85 48.90 62. and All Study Markets are weighted (by market population) averages.334.400 142.94 55.10 63.949 1.018 2.40 63.101 256.000 63.830 2.858.78 67.636.72 63.671 399.549 111.30 54.86 56.933 25.414 450.150 48.00 67.796 529.40 58.014 3.93 63.38 56.093.00 66.837 329.153 316.35 73. MJ ERVIN & ASSOCIATES 96 .88 64.030.890 2.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.30 52.17 Diesel 64.790 185.119 632.796 2.60 70.73 65.42 53.508 2.145.120 570.32 51.173 568.72 74.529 123.211 15.25 57.620.056.834 71.10 59.009 54.945.89 60.88 54.70 55.18 51.678.983 1.554 2.000 217.516.903 33.101 447.90 67.50 56.058 2.00 48.060.Table G: Study Market Data .72 58.

63 21.84 28.58 25.92 21.09 24.55 28.45 29.81 27.30 29.45 23.49 31.51 25.89 28.73 32.65 26.89 29.99 26.69 27.51 25.45 29.31 22.20 20.65 27.73 26.93 23.33 27.97 22.27 20.18 25.16 22.35 25.92 22.59 28. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.11 26.59 22.16 29.03 24.23 25.87 26.43 28.96 22.56 22.28 22.21 27.23 26.49 21.69 23.15 27.08 25.33 21.16 21.45 24.88 22.83 23.45 20. and All Study Markets are weighted (by market population) averages.37 27.57 22.43 20.01 28.83 24.43 21.15 20.90 27.25 24.03 21.45 22.33 22.34 25.28 23.75 22.78 Product taxes Midgrade Regular 26.63 26.76 25.48 25.99 28.94 23.45 25.32 33. Tax (by Grade) Rack Pt.36 26.95 22.93 27.33 21.47 27.82 28.63 28.06 28.88 28.50 20.76 24.97 25.40 27.34 26.33 22.07 26.83 24.42 27.34 20.47 20.Table H: Study Market Data . MJ ERVIN & ASSOCIATES 97 .45 24.42 24.33 22.45 20.75 27.51 20.93 23.63 20.42 25.63 24.47 28.04 26.40 25.81 25.59 22.13 23.26 27.83 22.54 28.88 20.81 28.36 24.95 Premium 26.98 25.83 25. Urban.26 28.02 23.96 24.32 21.59 28.33 21.08 23.88 20.42 24.68 Diesel 36.15 29.89 26.39 Note: Regional.01 22.45 20.45 28.90 26.33 21.97 23.04 24.18 28.95 25.20 27.07 26.92 30.21 27.85 28.65 21.15 24.25 31.41 22.74 21.23 23.39 22.25 27.39 21.88 22.92 20.38 24.23 24.98 28.64 28.57 29.88 28.51 31.33 21.84 28.59 28.89 25.55 28.38 24.39 21.41 27.53 23.82 21.96 24.07 24.27 29.45 20.91 21.59 24.Rack Price.49 25.43 20.25 28.50 25.07 24.07 24.03 20.09 27.49 21.81 21.63 25.83 24.95 22.43 21.39 22.17 20.

98 0.45 1.18 21.85 26.91 29.26 3.95 21.59 4.98 0.11 26.64 3.27 11.50 0.(∑x)2 ]/n2.22 5.13 11. Variance uses the formula [n∑x2 .81 28.52 30.73 22.63 58.00 22.11 31.02 3.49 57.91 2.20 5.98 31.73 10.07 0.12 23.23 7.47 0.84 28.91 0.83 12.94 17.28 1.82 3.24 7.62 56.44 25.12 6.66 28.14 7.04 28.10 6.34 0.71 33.35 27.89 21.50 58.04 0.15 66.Table J: Study Market Data .79 0.57 12.50 10.35 28.64 1.17 9.06 5.31 34.21 8.23 38.33 9.90 59.53 22.53 21.77 37.64 2.38 7.91 22.64 3.82 95 Retail Gross Product Margin 6.033 0.94 22.42 2. Costs.08 55.60 23.25 1.60 14.93 56.43 23.24 7.31 0.30 12.35 58.38 28.94 Note: Regional.22 14.18 7.26 5.02 0.01 31.38 2.54 50.28 1.16 3.01 0.89 28.00 4.56 24.89 0.47 58.44 56.73 2.86 49.70 22.98 1.21 8.18 55.27 60.36 20.14 60.48 7.07 30.92 22.16 54.41 12.38 0. MJ ERVIN & ASSOCIATES 98 .77 5.81 26.02 22.28 27.82 32.03 7.63 60.10 3.75 23.21 24.52 5.16 20.31 28.68 7.97 0.83 1.80 1.83 36.58 66.06 0.99 0.33 .68 7. Average Deviation is the average deviation of the market values from their mean (average) value.75 28.90 23.37 26.05 6.58 1.41 7.32 31.53 6.03 28.50 3.51 11.85 24.00 58.08 17.56 4.29 7.17 1.96 27.24 23.86 28. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.84 5.30 5.83 27.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.27 6.41 29.96 28.78 2.79 33.22 1.02 13.06 28.04 23.29 24.96 3.04 22.28 56.99 2.77 30.43 0.19 5.Blended Prices.95 6. Urban.34 1.88 31.17 11. and All Study Markets are weighted (by market population) averages.96 25.93 22.45 6.88 5.35 60.36 0.27 62.80 9.73 1.85 21.08 0.17 26.60 7.49 2.72 26.00 0.13 0.76 5.31 23.20 14.26 27.08 3.39 56.07 0.68 2.13 28.83 21.85 11.44 33.29 8.38 22.

250.750 $ 271.135 $ 199.000 2.716 Note: Regional.564 $ 252.098 $ (320.098.208) $ (226. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.542 $ 222.550 $ 177.014.766) $ (274. these averages are based on all applicable study markets.640 4.866) $ (244. outlet costs.677 $ 180.095.779 $ 121.071.375) $ (49.067 $ 92.143) $ (249.Table K: Study Market Data .478 4.622 $ 174.875 $ 255.900 $ 179.934 3.032 $ 77.120 $ 54. but for ancillary revenue.993 $ 113.913 $ 139.658.827.632 $ 256.900 2.144 2.467 $ 96.157.911) $ (166.129 $ 97.855 $ 278.837 $ 56.550 694.948 3.217 2.481 $ 96.966 3.102 $ 223.241) $ (227.502 $ (80) $ 60.117 $ 207.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.780 $ 85.013 $ 227.068 3. and consolidated outlet income these averages are based only on those markets with available data.465.805.272 $ 118.081 $ 222.023 $ (15.197.604.000) $ (241.295 $ 174.638 2.209 $ 82.630 3.542.688 $ 85.746 $ (374. For 95 net retail petroleum revenue.526 $ 207.010 1.572) $ (286.089.648 3.871) $ (128.852) $ 119.367) $ (164.520 5.223.332) $ (238.794 3.246 $ 118.544 $ 175.058.856 3.272 $ 210.719 3.265. Revenue.263 $ 60.646) $ (98.995 $ 234.004. MJ ERVIN & ASSOCIATES 99 .011. Outlet Costs.890.000 $ 156.302 $ 69.694 3.772. and All Study Markets are weighted (by market population) averages.289 981.066 3.429 $ 238.956) $ 200.224 $ 189.800 $ 225.557) $ 102.074 $ 131.394.707 $ 260.Sales.510 $ 60.885. Urban.244 95 net retail Ancillary Revenue petroleum revenue $ 208.623 2.247 4.279 $ 154.626 $ 81.209 $ 26.

004 3.50 3 10.98 6.60 3.98 7.91 12.845 15.01 7 2.55 19 11.29 1. of Brands No.13 2 11.23 8 31.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.29 8 7.42 5 14. of Outlets No.250 981 2.775.24 0.000 pop’n No.970 330.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.310 1.06 16 4. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.50 9.36 5.51 9 11.04 15 4.97 8.475 3.40 9 4.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.90 13 4.68 4 7.17 19 9.975 2.089 3.275.41 0.550 1.604 3.071 2.48 7 7.30 0.89 2 4.52 13 5.43 12.00 11.Demographic Profiles Population pop’n 299 .180 616.08 3.54 6 2. N refers to study sample size (total = 481).73 5 10.465 694 3.47 14 3.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.223 3.20 0.08 4 2.585 6.96 5.60 11 7.715 14.79 6.08 16 3.22 3.28 17. inverse ranking is used (lowest value = 1).870 120.45 14.22 0.745 16.Table L: Study Market Data .89 7.20 17 14.73 14.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.76 18 5.50 8.775 678.84 12 5.91 17 4.21 0.80 10 4.394 2.02 0.095 3.53 10 6.542.88 11 8.675 179.10 3.45 0.014 5. rank* 3.33 0.88 12 7.23 6 7.658 3.06 5.38 0. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.098 4.95 3 9.315 710.145 81.41 1.827 3.06 1 5.85 15 11.400 74.265 2.40 1 3. MJ ERVIN & ASSOCIATES 100 .27 0.605 16.157 2.27 1.47 7.30 1.058 1.790 1.

aviation and lubricants marketing channels. Vice President Public Affairs Address: 275 Slater Street. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. and in doing so.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. They maintain a large database of historical prices at most major centres. 119 . Senior Advisor.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. bulk. Petroleum Products Address: 235 Queen Street. Ottawa ON. Ottawa ON. a series of studies whose goal is to strengthen Canada’s competitiveness. safety and business issues. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF).14th Street NW Calgary AB. cardlock. Contact: Michael J. accessible through a public fax-back dial-in system. generate jobs and growth. Contact: Maureen Monaghan Address: 580 Booth Street. The SCF is the basis for this study. Principal Address: #400. and provide background resources to industry public affairs managers and the media. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . health. They work with major oil companies in benchmarking performance in the retail. Ottawa ON. Ervin. Contact: Cindy Christopher. Contact: Brendan Hawley.

Octane Magazine Octane is Canada’s refining and marketing trade journal. Octane is published quarterly.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Managing Editor Address: Suite 2450. Contact: Gerard O’Connor.6th Ave. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf.ab. Contact: Len Bradley. Calgary AB. Energy Section Address: Statistics Canada. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms.6th Avenue. 101 . no 45-004) is a useful source of supply and demand volume data. Its monthly publication “Refined Petroleum Products” (cat. 311 . Contact: Robert Curran. SW Calgary. and is a useful “window” on this industry. Ottawa ON. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Executive Director Address: 214.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Supervisor.